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Econ 101 - Microeconomics - All Chapters on Exam

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ECON 101
Ratna Shrestha

June 2011 Jessica GiangDecisionsJune 21 2011Who will work to make good and give services Who will not workWhat good should be produced How manyMore SUVsLess ToyotasWhat resources to use Labour aka human capital the main factors of inputproductionwhatever you use in a production process physical capital machines computers tools Monopoly even if you have one you cannot charge the highest price will not maximize your prot because ppl demand will drop as people look for alternativessubstitutes Ie Car cab bikes instead of taking the busEven if there are no substitutes charging very high is not a good way to maximize protsEfficiency the allocation of resources that maximizes total surplus benet received by all members of a societyEquity the fairness of distribution of wellbeing among the members of a societyCH 1TEN PRINCIPLES OF ECONOMICSHow people make decisions1People face tradeoffsto get one thing you usually give up another Ie if you want to work 10 hrs instead of 8 then you have 2 hours less for leisureIe Efficiency bigger pie vs equity equal slices2Opportunity costwhat you give up to get what you want If you want 2 hours leisure time you give up the money you could have made if you worked those 2 hours3Rational people think at the marginmarginal changes are small incremental adjustments to an existing plan of actionIe Not an allornothing approach but a should I have another bite Study another hour kind of approachRatna used appledecreasing satisfaction exampleCompare cost price of apple and benets satisfaction from appleCost of one more benet of one more Marginal BenetMarginal Costif MB is higher than MC then you go for that option4People respond to incentives1 bonus mark is incentive to come to classMarginal changes in cost or benets motivate people to respond ie Carbon taxHow people interact5Trade can make everyone better offdont have to be selfsufficient can specialize and enjoy more GS You have something the other person wants they have something you want6Markets are usually a good way to organize economic activitymarket economy where households and business rms determine what to buy to make who to work for and hireHouseholds and rms decisions are inuenced by price and selfinterest Supplydemand determines the price How much you value something determines if you buy it or not ie Determines allocation of resources you dont get the computer other people get the computer 7Government can sometimes improve market outcomes ie Increase GDPif market failure results in inefficiency failure of the invisible hand then the govt can intervene to promote efficiencyequityExternalities are a market failure one persons action harms anotherMarket power is the ability of a single person or small group to unduly inuence market pricesAsymmetric information is when one party seller or buyer has more information about a product than the other party ie Insiders know more about how the company is doing than do the shareholdersGovt can make it mandatory to release this informationIe If ICBC prots 100 by charging a higher price but consumers altogether lose more than 100this is bad for GDP decide to bike instead of drive they become less efficient if it makes them more unproductivemaybe they have less time for work maybe theyre tired and dont make as many goods as they could haveCost of people outweighs benet of ICBCHow does the economy as a whole work8A countrys SoL depends on its ability to produce goods and services being able to provide more goods and servicesbetter SoL and higher GDPJune 2011 Jessica GiangProductivityamount of goods and services produced each hour a person worksHigher productivityhigher SoL higher productivity means you earn more money9Ination occurs when the govt prints too much moneymore money in the economy but same amount of GS means that value of money decreases10 Society faces a shortrun tradeoff between ination and unemploymentPhillips curveif you control ination by decreasing money supplyincreasing taxes then unemployment increases tradeoff In the SHORT RUN people have less money but prices of goods are sticky people will buy less producers will produce less and employ less peopleunemploymentGovt and open market operations to increase or decrease money supplyCH 2THINKING LIKE AN ECONOMISTCircular ow modela simply way of describing all the economic transactions that occur in a market economyConsists of households businesses product markets nal goods and services resource markets labour land capital Production possibilities frontier PPFa graph showing the various combinations of output the the economy can produce given the available factors of production and technology the best combination of output derived from given factors of productionShows efficiency tradeoffs opportunity cost and economic growth PPF will be drawn largerCurved PPF means that the cost of producing X at the expense of Y increases as you move along the curve top of curvesacrice little Y for X middle of curvesacrice more Y for XPositive descriptive analysis statements or assertions dealing with matters of FACT or QUESTIONS about how things areNormative prescriptive analysis statements about how the world should be CHAPTER 3INTERDEPENDENCE AND THE GAINS FROM TRADEWeve moved from agricultureminingconstruction to producing more GSTo satisfy our needs we can either be economically selfsufficient to participate in economic interdependence specializing and trading with othersInterdependence prevails because people are better off when they specialize in the goods which they can produce at lower opportunity costs and then trading with others to get goods that we dont have a comparative advantage inAs long as there are differences in opportunity costs everyone can benet from tradeProposed Trade Ratio Slope 10 Meat for 5 Potato2 5 potatoes is traded for 10 meat Farmers OC of 1 potato is 1 meatWith the above TR farmer trades 1 potato for 2 meatAny TR greater than 1 such as the proposed TR above makes the farmer better offRanchers OC of 1 potato is 4 meatWith the above TR rancher trades 2 meat for 1 potato Any TR smaller than 4 will make rancher better offAny TR between 1 and 4 will make BOTH better offThe Principle of Comparative Advantage Decides who should specialize in what and trade for what depending on opportunity costsComparative advantage producer that has a lower opportunity cost in producing a goodAbsolute advantage producer that requires a smaller quantity of inputs to produce a goodInterdependence and trade allow everyone to enjoy a greater quantity and variety of goods and services
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