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Economics 1021A/B Study Guide - Final Guide: Average Cost, Variable Cost, Production Function


Department
Economics
Course Code
ECON 1021A/B
Professor
Jeannie Gillmore
Study Guide
Final

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Economics 1021 Exam Review
Chapter 2
Production Possibilities and Opportunity Cost
Production Possibilities Frontier-the boundary between those combinations of
goods and services that can be produced and those that cannot.
-The PPF illustrated scarcity because we cannot attain the points outside the
frontier.
-Production is possible at any point inside the orange area on the frontier.
-Points inside the frontier are inefficient because resources are wasted or
misallocated.
Production efficiency is achieved if goods and services are produced at the lowest
possible cost.
-At points inside the PPF, production is inefficient because we are giving up more
necessary of one good to produce a given quantity of another good.
-Only when we produce on the PPF do we incur the lowest possible cost of
production.
Opportunity Cost-is the highest alternative foregone.
-Opportunity cost is a ratio. It is the decrease in the quantity produced of one good
divided by the increase in the quantity produced of another good as we move along
the PPF.
-Increasing opportunity cost for a good increases when the quantity produced of
that good increase.
Using Resources Efficiently
Allocative Efficiency-when goods and services are produced at the lowest possible
cost and in the benefits that provide the greatest possible benefit.
Marginal Cost-the opportunity cost of producing one more unit of it.
-The marginal cost of producing pizza increases as the quantity of pizzas produced
increases.
-Marginal cost is calculated from the slope of the PPF.
Marginal Benefit-the benefit received from consuming one more unit of it. The
benefit is subjective; it depends on people’s preferences.
-The device we use to illustrate preferences is the marginal benefit curve. This curve
shows the relationship between the marginal benefit from a good and the quantity
consumed of that good.
-The most you are willing to pay for something is the marginal benefit.
-When marginal benefit equals marginal cost, resources are being used efficiently.
Economic Growth
The expansion of production possibilities is called economic growth.
-Technological change is the development of new goods and of better ways to
producing goods and services.

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-Capital accumulation is the growth of capital resources, including human capital.
-The opportunity cost of economic growth is foregone current consumption.
-Economic growth pushes the PPF outwards.
Gains From Trade
Comparative Advantage is an activity if that person can perform the activity at a
lower opportunity cost than anyone else.
Absolute Advantage-occurs when a person is more productive than others.
-Absolute advantage involves comparing productivities-production per hour-where
as comparative advantage involves comparing opportunity costs.
-Comparative advantage occurs when one person’s opportunity cost of producing a
good is lower than another person’s opportunity cost of producing that same good.
Economic Coordination
Decentralized coordination works best but to do so it needs four complementary
social institutions. They are
Firms
Markets
Property Rights
Money
-A firm is an economic unit that hires factors of production and organizes those
factors to produce and sell goods and services.
-Markets are any arrangements that enable buyers and sellers to get information
and do business with each other.
-The social arrangements that govern the ownership use, and disposal of anything
that people value are called property rights.
-Money is any commodity or token that is generally acceptable as a means of
payment.
Chapter 3 Demand and Supply
Markets and Prices
-A competitive market is a market that has many buyers and sellers, so no single
buyer or seller can influence the price.
-The price of an object is the number of dollars that must be given up in exchange
for it. Economists refer to this price as the money price.
-The ratio of one price to another is called a relative price, and relative price is an
opportunity cost.
Demand
If you demand something, then you:
1.Want it
2. Can afford it
3.Plan to buy it

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-The quantity demanded of a good of service is the amount that consumers plan to
buy during a given time period at a particular price.
-The Law of Demand states:
Other things remaining the same, the higher the price of a good, the smaller is the
quantity demanded; and the lower the price of a good, the greater is the quantity
demanded.
Substitution Effect-When the price of a good rises, things remaining the same, it’s
relative price-its opportunity cost-rises.
Income Effect-When a price rises, other things remaining the same, the price rises
relative to income.
-When any factor that influences buying plans changes, other than the price of a
good there is a change in demand.
-Six main factors being changes in demand. They are changes in:
The prices of related goods
Expected future prices
Income
Expected future income and credit
Population
Preferences
-Substitutes are goods that can be used to replace other goods.
-Complements are goods that are used in conjunction with another good.
-A normal good is one for which demand increases as income increases.
-An inferior good is one for which demand decreases as income increases.
Law of Demand-energy bars
Decreases if:
-The price of an energy bar rises
Increases if:
-The price of an energy bar falls
Changes in Demand-energy bars
Decreases if:
-The price of a substitute falls
-The price of a complement rises
-The expected future price of an energy bar falls
-Income falls* (inferior good)
-Expected future income falls of credit becomes
harder to get
-the population decreases
Increases if:
-The price of a substitute rises
-The price of a complement falls
-The expected future price of an energy bar rises.
-Income rises*(normal good)
-Expected future income rises or credit becomes
harder to get.
-The population increases.
*Changes in the quantity demanded move along the demand curve while
changes in demand shift the curve.
Supply
-If a firm supplies a good or service, the firm
1.Has the resources and technology to produce it
2.Can profit from producing it
3. Plans to produce it and sell it.
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