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Midterm

ECON 101 Midterm 1 Review Package

15 Pages
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Department
Economics
Course Code
Economics 1021A/B
Professor
P Ferguson

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Description
ECON 101 Mid-Term 1 Review Chapter 1: • All economic questions arise because we want more than we can get. • Our inability to satisfy all our wants is called scarcity. • Because we face scarcity, we must make choices. • The choices we make depend on the incentives we face. • An incentive is a reward that encourages an action or a penalty that discourages an action. • Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. • Economics divides in to main parts:  Microeconomics  Macroeconomics Test your understanding! What is the difference between microeconomics and macroeconomics? • Goods and services are produced by using productive resources that economists call factors of production. • Factors of production are grouped into four categories:  Land  Labour  Capital  Entrepreneurship • You can think about every choice as a tradeoff—an exchange— giving up one thing to get something else. • Opportunity Cost • Thinking about a choice as a tradeoff emphasizes cost as an opportunity forgone. • The highest-valued alternative that we give up to get something is the opportunity cost of the activity chosen. Test your understanding! Give three examples of Opportunity Costs that you make every day. - __________________________________________________________ - __________________________________________________________ - __________________________________________________________ • Choosing at the Margin • People make choices at the margin, which means that they evaluate the consequences of making incremental changes in the use of their resources. • The benefit from pursuing an incremental increase in an activity is its marginal benefit. • The opportunity cost of pursuing an incremental increase in an activity is its marginal cost.  What is—positive statements  What ought to be—normative statements Chapter 2 The production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot. Points on the frontier are efficient. Every choice along the PPF involves a ________. Remember: The marginal cost of a good or service is the opportunity cost of producing one more unit of it. • The marginal benefit of a good or service is the benefit received from consuming one more unit of it. • We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good or service. When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved allocative efficiency. To invest or not to invest in capital (economic growth)? Two key factors influence economic growth:  Technological change  Capital accumulation Comparative Advantage and Absolute Advantage A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else. A person has an absolute advantage if that person is more productive than others. Test your understanding! 1. When would there be a trade-off between two people? 2. Roughly show on a graph how their PPF would change if they completed a trade-off. 3. In what scenario would you not consider doing a trade off? *hint: think about comparative advantage! Chapter 3 • The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price. • The Law of Demand • The law of demand states: o Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and • The law of demand results from  Substitution effect  Income effect  The term demand refers to the entire relationship between the price of the good and quantity demanded of the good.  A demand curve shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same. Six main factors that change demand are  The prices of related goods  Expected future prices  Income  Expected future income and credit  Population  Preferences Test your understanding! For the following, indicated if there is an increase, decrease, or no change in the demand. If applicable, identify the factor that changed it 1. News release that Pepsi has 10,000 calories. Show the change on the demand for Pepsi. 2. New wave of one trillion immigrants from China to Canada. Show the change on the demand for milk in Canada. 3. Recession hits! All Canadians’ income drops significantly. Show the change on the demand for SPAM (cheap meat). Supply • The law of supply states: • Other things remaining the same, the higher the price of a good, the greater is the quantity supplied • The term supply refers to the entire relationship between the quantity supplied and the price of a good. • The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same. • The five main factors that change supply of a good are  The prices of factors of production  The prices of related goods produced  Expected future prices  The number of suppliers  Technology  State of nature Equilibrium • The equilibrium price is the price at which the quantity demanded equals the quantity supplied. • The equilibrium quantity is the quantity bought and sold at the equilibrium price.  Price regulates buying and selling plans.  Price adjusts when plans don’t match. • At prices above the equilibrium price, a surplus forces the price down. • At prices below the equilibrium price, a shortage forces the price up. Chapter 4 • The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same. • Calculating Elasticity • The price elasticity of demand is calculated by using the formula: Percentage change in quantity demanded Percentage change in price Test
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