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Economics 1021A/B Microeconomics Exam Study Guide.docx

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Economics 1021A/B

1021 Microeconomics Exam Study Guide rdExam April 23 2012 CHAPTER 1 WHAT IS ECONOMICS Definition of Economics All economic questions arise from scarcityBecause wants exceed the resources available to satisfy them we cannot have everything we want and must make choices o Choices depend on incentivesrewards that encourage actions and penalties that discourage actionsEconomics is the social science that studies the choices people make to cope with scarcity o Microeconomics studies choices of individuals and businesses o Macroeconomics studies national and global economies Two Big Economic Questions Two questions summarize the scope of economicsHow do choices determine what how and for whom goods and services are produced and in what quantitiesHow can choices made in the pursuit of selfinterest also promote the social interest The factors of production used to produce goods and services areLand shorthand for all natural resources which earns rentLabour includes human capitalknowledge and skills from education training experience which earns wagesCapital machinery which earns interestEntrepreneurship which earns profit Choices made in selfinterest are best for the person making them Choices that are in the social interest are best for society as a wholeMarkets often provide incentives so that the pursuit of our selfinterest also promotes the social interest but self interest and social interest sometimes conflictEconomic principles allow us to understand when selfinterest promotes the social interest when they conflict and policies to reduce those conflicts The Economic Way of Thinking A choice is a tradeoffwe give up one thing to get something elseand the opportunity cost of any action is the highestvalued alternative forgone Opportunity cost is the single most important concept for making choices Economic tradeoffsguns versus butter tradeoffs between any pair of goodswhat how and for whom tradeoffsThe big tradeoffbetween equality and efficiency Government redistribution using taxes and transfers weaken incentives so a more equally shared pie results in a smaller pie We make choices in small steps or at the margin and choices are influenced by incentivesEconomic choices are made by comparing the additional benefitmarginal benefitand additional costmarginal costof a small increase in an activity If marginal benefit exceeds marginal cost we choose to increase the activity By choosing only activities that bring greater benefits than costs we use our scarce resources in the way that makes us as well off as possibleGiven a change in incentivesrewards and penalties for particular actionswe can predict how choices will change by looking for changes in marginal benefit and marginal cost Economists assume that it is human nature for all peopleconsumers producers politicians public servantsto pursue their selfinterest Incentives are key for reconciling selfinterest and the social interest Economists identify incentive systems and institutions like a legal system protecting personal security and private property that result in selfinterested choices leading to the social interestCHAPTER 2 THE ECONOMIC PROBLEM Production Possibilities and Opportunity Cost The production possibility frontier PPFIs the boundary between unattainable and attainable production possibilitiesShows maximum combinations of outputs goods and services that can be produced with given resources and technology PPF characteristicsPoints on PPF represent production efficiencyoutputs produced at the lowest possible costPoints inside the PPF are inefficientattainable but not maximum combinations of outputs they represent unused or misallocated resourcesPoints on PPF are preferred to points inside PPFPoints outside PPF are unattainableChoosing among efficient points on PPF involves an opportunity cost highestvalued opportunity foregone and a tradeoff PPFs are generally bowed outward concave reflecting increasing opportunity costs as more of a good is producedPPF is bowed outward because resources are not equally productive in all activities nonhomogeneous Resources most suitable for a given activity are the first to be usedBowedoutshaped PPF represents increasing opportunity costopportunity cost of good increases as its quantity produced increasesIn moving between two points on PPF more good X can be obtained only by producing less good YOpportunity cost on PPF of additional X is amount of Y forgoneNo opportunity cost in moving from point inside PPF to point on PPFUsing Resources Efficiently To choose among points on PPF compare
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