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[ECO100Y1] - Final Exam Guide - Ultimate 23 pages long Study Guide!Premium

23 pages273 viewsFall 2016

Department
Economics
Course Code
ECO100Y1
Professor
Robert Gazzale
Study Guide
Final

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UTSG
ECO100Y1
FINAL EXAM
STUDY GUIDE
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Models have implications
Models can be applied to scenarios to predict implication of a course of action
If predictions from model is good, model is good
Economists develop models to explain the world
Scarcity necessitates choice
Not all choices should/will be made by individuals
Individual choices influence societies choice
In market economy, my choices influence your choices and vice versa
Necessity of choice
Economics is about allocation of scarce resources (land, labor, physical and human capital)
Therefore there is tradeoff
Resources are limited; not all demands can be satisfied
If you buy one thing, you can't use the money to buy something else
Cost is just how much is paid for product; there's also the associated cost of what you lost by choosing to buy that
particular product instead of something else
What is given up to spend on the other thing
Opportunity cost is the value of the alternative foregone
Government must consider benefits on spending on environment versus spending on education
Ex. If government chooses to spend money on environment, they must do so at a cost to spending on education
Today, in vitro fertilization allows women to pursue a law degree and be able to have children later in life.
Law degrees no longer come at the opportunity cost of having a family
Ex. In past, women had to choose between education/career and having children. Women choosing to take a law
degree did so at the cost of not being able to have children later in life
The cost of giving up CD A was $14.
Explicit cost (what you pay -> $10) + Implicit Cost (net value of foregone opportunity -> $14 - $10) = $14
Ex. (Slide 22-23) CDs cost $10. You have $20. CD A is worth $14 to you. CD B is worth $16. You would only buy CD C
if it's value to you was $14 or greater
Ex. (Slide 24) If you valued 8 coffees at $20 and spending 3 hours with your friends at $45, then choosing to go to
the movies would come at a cost of $20 + $45 = $65
Higher the monetary price, higher the amount of things that must be forsaken, therefore implies higher
opportunity cost
People respond to incentives
Self interested
People choose what makes them better off
Scarcity and Opportunity Cost
Accounting profit is revenue - explicit costs
Economic profit is revenue - explicit and implicit costs
Profit is economic profit
Cost of income that could have been earned if capital had been employed in next best use
There is opportunity cost to capital
Accounting and Economic Profit
Sunk cost is non-refundable
To be ignored when considering future actions
Sunk Cost
Forego self-sufficiency because trade has benefits
Everyone benefits if people specialize
You know others will be available to provide goods/services that you didn't specialize in
Markets enable specialization
Trade
Efficient when all available resources are used to maximum and no one can be better off
Equity can get in the way of efficiency
Markets and invisible hand lead to efficiency
Equilibrium establishes itself because people respond to incentives
Market failure occurs when individual gain makes society worse off
Efficiency
Monday September 12 and Wednesday September 14
Thinking Like an Economist - Lectures 1 and 2
ECO100 Page 1
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Government intervention can help out
Ex. Drug companies charge loads to make profit but people can't afford the drugs
Market failure occurs when individual gain makes society worse off
More spending, more income
Less spending, less income
One's spending is another's income
Too much spending leads to inflation; too little leads to recession
Government intervention (spending, taxes, money supply) can change overall spending
Economy-Wide Interactions
Perfectly rational utility maximizers, perfectly rational profit maximizers
Economic assumes perfect rationality
Behavioral Economics
Concerns about tipping
Make choice close to but not exactly best economic outcome
Bounded rationality
Sacrifice economic payoff to avoid potential loss
Risk aversion
Rational
Sunk costs
Ignore implicit/non-monetary costs
Misconception of opportunity cost
Overconfidence
Unrealistic expectations about future behaviour
Counting dollars unequally
Mental accounting
Don't want to admit you made a mistake
Refuse to recognize sunk costs/money is irrecoverable
Loss aversion
Status quo bias
Irrational
Normative: what you ought to do
Positive: descriptive, theoretically verifiable
Positive and normative analysis
ECO100 Page 2
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