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Econ 101 - Microeconomics - All Chapters on Exam

Course Code
ECON 101
Ratna Shrestha
Study Guide

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Decisions!!!!!!!!!!June 21 2011
-Who will work to make good and give services? Who will not work?
-What good should be produced? How many? More SUVs = Less Toyotas
-What resources to use? Labour aka human capital (the main factors of input/production whatever
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 profit
because ppl demand will drop as people look for alternatives/substitutes. I.e. Car, cab, bikes instead of
taking the bus). Even if there are no substitutes, charging very high is not a good way to maximize
-E!ciency: the allocation of resources that maximizes total surplus (benefit) received by all members of a
society. Equity: the fairness of distribution of well-being among the members of a society
How people make decisions
1) People face tradeo"s to get one thing you usually give up another. I.e. if you want to work 10 hrs
instead of 8, then you have 2 hours less for leisure. I.e. E!ciency (bigger pie) vs equity (equal slices)
2) Opportunity cost what 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 hours.
3) Rational people think at the margin marginal changes are small, incremental adjustments to an
existing plan of action. I.e. Not an all-or-nothing approach, but a “should I have another bite? Study
another hour?” kind of approach. Ratna used apple & decreasing satisfaction example. Compare cost
(price of apple) and benefits (satisfaction from apple). “Cost of one more, benefit of one more”
-Marginal Benefit & Marginal Cost if MB is higher than MC, then you go for that option.
4) People respond to incentives 1% bonus mark is incentive to come to class.
-Marginal changes in cost or benefits motivate people to respond i.e. Carbon tax
How people interact
5) Trade can make everyone better o" don’t have to be self-su!cient, can specialize and enjoy more
G&S. You have something the other person wants, they have something you want.
6) Markets are usually a good way to organize economic activity market economy where households
and business firms determine what to buy, to make, who to work for and hire. Households and firm’s
decisions are influenced by price and self-interest. Supply & demand determines the price. How much
you value something determines if you buy it or not, i.e. Determines allocation of resources (you don’t
get the computer, other people get the computer)
7) Government can sometimes improve market outcomes (i.e. Increase GDP) if market failure results in
ine!ciency (failure of the invisible hand), then the gov’t can intervene to promote e!ciency/equity
-Externalities are a market failure (one person’s action harms another)
-Market power is the ability of a single person or small group to unduly influence market prices
-Asymmetric information is when one party (seller or buyer) has more information about a
product than the other party i.e. Insiders know more about how the company is doing than do
the shareholders. Gov’t can make it mandatory to release this information.
-I.e. If ICBC profits $100 by charging a higher price, but consumers altogether lose more than
$100 this is bad for GDP (decide to bike instead of drive, they become less e!cient if it makes
them more unproductive maybe they have less time for work, maybe they’re tired and don’t
make as many goods as they could have. Cost of people outweighs benefit of ICBC.)
How does the economy as a whole work?
8) A country’s SoL depends on its ability to produce goods and services (being able to provide more goods
and services = better SoL and higher GDP)
June 2011 Jessica Giang

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-Productivity amount of goods and services produced each hour a person works. Higher
productivity = higher SoL (higher productivity means you earn more money)
9) Inflation occurs when the gov’t prints too much money more money in the economy but same
amount of G&S means that value of money decreases
10) Society faces a short-run tradeo" between inflation and unemployment
-Phillips curve if you control inflation (by decreasing money supply/increasing taxes), then
unemployment increases (tradeo"). 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 people unemployment.
-Gov’t and open market operations to increase or decrease money supply.
Circular flow model a simply way of describing all the economic transactions that occur in a market
economy. Consists of households, businesses, product markets (final goods and services), resource
markets (labour, land, capital),
Production possibilities frontier (PPF) a 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 production)
-Shows e!ciency, tradeo"s, opportunity cost, and economic growth (PPF will be drawn larger)
-Curved PPF means that the cost of producing X at the expense of Y increases as you move along
the curve (top of curve = sacrifice little Y for X, middle of curve = sacrifice more Y for X).
Positive (descriptive) analysis: statements or assertions dealing with matters of FACT or QUESTIONS
about how things are
Normative (prescriptive) analysis: statements about how the world should be
-We’ve moved from agriculture & mining/construction to producing more G&S.
To satisfy our needs, we can either be economically self-su!cient to participate in economic
interdependence (specializing and trading with others). Interdependence prevails because people are
better o" when they specialize in the goods which they can produce at lower opportunity costs, and then
trading with others to get goods that we don’t have a comparative advantage in. As long as there are
di"erences in opportunity costs, everyone can benefit from trade.
Proposed Trade Ratio (Slope): 10 Meat for 5 Potato = 2 (5 potatoes is traded for 10 meat)
- Farmer’s OC of 1 potato is 1 meat. With the above TR, farmer trades 1 potato for 2 meat. Any TR
greater than 1 (such as the proposed TR above) makes the farmer better o".
Rancher’s OC of 1 potato is 4 meat. With the above TR, rancher trades 2 meat for 1 potato. Any TR smaller
than 4 will make rancher better o". Any TR between 1 and 4 will make BOTH better o".
The Principle of Comparative Advantage
- Decides who should specialize in what and trade for what, depending on opportunity costs.
Comparative advantage: producer that has a lower opportunity cost in producing a good
Absolute advantage: producer that requires a smaller quantity of inputs to produce a good
Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods and services
June 2011 Jessica Giang

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-Producers determine supply, consumers determine demand
Market: an institution, mechanism, or arrangement that facilitates the exchange of G&S. Also, a group of
buyers and sellers of a particular good or service (e.g. A market for cars, computers, legal services).
Competitive market
-The goods o"ered for sale are all exactly the same
-So many buyers and sellers that no single person can influence the price of the G&S.
-Price is determined by total demand and supply (buyers and sellers are price takers).
-Firms can enter or exit freely.
Monopoly: one seller controls the price. E.g. BC Hydro, Shaw Cable, ICBC
Oligopoly: few sellers, very little competition. Prices are determined by looking at a rival’s price.
Monopolistic Competition: many sellers, each seller produces slightly di"erent products (di"erentiated
products) i.e., Honda Civic is di"erent from Toyota Corolla, but they are both cars.
Quantity demanded refers to the amount (quantity) of a good that buyers are willing to purchase at
various prices for a given period. Law of Demand: other things being equal, there is a negative rlnship
between price and quantity: if prices are higher, demand is lower; if prices are lower, demand is higher.
Qd = Qd (P) quantity demanded is a function of the price.
Total market demand: sum of all individual demands at each possible price (e.g. 2+ people buying
identical products at the same price. However much they buy combined is the market demand).
What determines demand?
1) Price: when price is high, demand is low. When price is low, demand is high
2) Consumer income: if you have more wealth, you want to buy more (demand higher)
-Normal goods: as income increases, your demand for this type of good increases (car, house).
-Inferior goods: as income increases, demand for these goods decrease. E.g. Used goods.
3) Prices of related goods (substitute goods): a fall in the price of one good reduces the demand for
another good (shift demand curve left).
-Substitute goods: two goods for which an increase in the price of one leads to an increase in the
demand for the other. I.e. Coke and pepsi
-Complement goods: two goods for which an increase in the price of one leads to a
- decrease in demand for the other i.e. Hot fudge and ice cream (since they’re often eaten
4) Tastes: you buy more of whatever you like. As your tastes change, what you buy changes.
5) Expectations about the future a"ect your demand today. I.e. If you think you’ll earn more you buy more
6) Number of consumers: more consumers, more demand.
Ceterus paribus: all the relevant variables (e.g. Determinants of demand listed above) are held constant,
EXCEPT for the one being studied at the time.
Change in quantity demanded (due to price change) reflects a movement ALONG the d-curve.
Change in demand (not due to price) is a SHIFT in the demand curve left or right.
June 2011 Jessica Giang
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