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ECO 11104 NOTES FOR THE FINAL EXAM (the whole year)

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Gordon Lenjosek

Chapter 1: The Principles of Economics Economics: the study of how society manages its scarce resources 10 Principles of Economics: first 4 about how people make decisions, next 3 about how people interact with each other and the last 3 about how the economy as a whole works Principle #1: People Face Tradeoffs Tradeoff: What you give up for another thing  Ex: A clean environment and higher incomes. Environment laws reduce pollution but is also a higher cost on firms, thus reducing profit Efficiency: getting the most out of scare resources Equity: distributing resources fairly amongst society Tradeoff between efficiency & equity  Ex: progressive taxing system Better decisions are made by recognizing tradeoffs, and their available options Principle #2: The Cost of Something Is What You Give Up to Get It Opportunity cost: what must be given up to obtain an item Principle #3: Rational People Think at the Margin Rational people: consumers who do the best they can to achieve their goals given the opportunities they have Marginal Changes: small adjustments to an already established plan of action  As long as the marginal benefits are higher than the marginal costs, then profit will be made  Marginal benefit depends on the availability of the good; water has a low marginal benefit whereas diamonds have a high one, because water is more available than diamonds Principle #4: People Respond to Incentives Ex: of indirect effects of incentives  seatbelt laws were made to reduce accidents, but it only gave incentives for people to drive less cautiously, which resulted in more accidents and more pedestrian deaths that driver deaths Principle #5: Trade Can Make Everyone Better Off Trade allows each person to specialize in the activity that they do best. This results in a greater variety of goods at a lower service cost for both parties. Pr
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