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[MGEA01H3] - Final Exam Guide - Ultimate 33 pages long Study Guide!


Department
Economics for Management Studies
Course Code
MGEA01H3
Professor
Michael H O
Study Guide
Final

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UTSC
MGEA01H3
FINAL EXAM
STUDY GUIDE

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MGEA01/Microeconomics – Chapter 1 – First Principles
Introductory Terminology:
Economy: a system for coordinating society’s productive activities
Economics: the social science that studies the production, distribution and consumption of goods and
services
Market economy: an economy in which decisions about production and consumption are made by
individual producers and consumers
The Invisible Hand: the way in which the individual pursuit of self-interest can lead to good results for
society as a whole
Microeconomics: the branch of economics that studies how people make decisions and how these
decisions interact
Market failure: occurs when the individual pursuit of self-interest leads to bad results for society as a
whole
Macroeconomics: the branch of economics that is concerned with overall ups and downs in the economy
Economic growth: the growing ability of the economy to produce goods and services
Reason we study economics:
-We have limited resources (scarcity)
-But unlimited wants
Thus the study of economics is how we can make use of the limited resources we have to satisfy the
unlimited wants of humans.
Chapter Overview: The First Principles
A set of principles for understanding how individuals make choices (micro)
A set of principles for understanding how individual choices interact (micro)
A set of principles for understanding economy-wide interactions (macro)
The Categories of Principles:
1. The Principles of Individual Choice
2. The Principles of the Interaction of Individual Choices
3. The Principles of Economy-Wide Interactions
The Principles of Individual Choice:
Individual Choice: the decision by an individual of what to do, which necessarily involves a decision of
what not to do
-Is involved at the most basic level of every economic issue.
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Basic principles behind the individual choices:
1. Resources are scarce.
2. The real cost of something is what you must give up to get it (Opportunity Cost)
3. “How much?” is a decision at the margin (Trade-offs)
4. People usually take advantage of opportunities (incentives) to make themselves better off.
Principle #1: Choices are Necessary Because Resources are Scarce
People must make choices because resources are scarce
Resource: anything that can be used to produce something else
Examples: land, natural resources (lumber, petroleum), labour, capital (money/income), human
capital (intelligence, skill), time,
Such resources are scarce as the quantity available is not large enough to satisfy all productive
uses
Principle #2: The True Cost of Something is Its Opportunity Cost
The real cost of an item is its opportunity cost: what you must give up in order to get it.
Opportunity cost is crucial to understanding individual choice
Example: The cost of attending an economics class is what you must give up to be in the
classroom during the lecture. Sleep? Watching TV? Rock climbing? Work?
All costs are ultimately opportunity costs. The costs can be monetary and non-monetary
Choosing to spend money/time on one resource/activity means choosing not to spend time on a
different resource/activity
It is all about what you have to forgo to obtain your choice
Principle #3: “How Much” Is a Decision at the Margin
Making trade-offs at the margin: comparing the costs and benefits (trade-offs) of doing a little
bit more of an activity versus doing a little bit less (marginal decisions)
Trade-off: when you compare the costs with the benefits of doing something
oTrade-offs are always involved in choices due to scarcity as there are costs and benefits to
everything (pros and cons)
oExample: Giving up the time during your lunch break to eat your lunch (con) to study for your
test do you well instead (pro)
oExample: 4 year degree (out of pocket cost = explicit cost)
Sacrifice: Tuition 10,000 + Textbooks, entertainment, etc. 10,000 = $20,000
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