[ECON 1132] - Midterm Exam Guide - Everything you need to know! (12 pages long)

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ECON 1132
MIDTERM EXAM
STUDY GUIDE
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Macroeconomics - Konan!
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Ch. 1 - Foundations and Models!
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I. What is economics?!
the study of how people or firms choose to allocate their scarce resources!
the study of how to best allocate resources
scarcity -> limited resources!
study of how to make decisions or choices in light of scarcity!
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resources -> inputs, factors of production, finished goods used to produce other goods!
labor, capital, and land (primary factors of production)!
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capital -> equipment!
land -> natural resources as well as land!
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II. 3 Key Concepts in Economics!
1) "rationality" -> people are rational, economists make this assumption!
do the best they can to meet objectives, use all information available!
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2) "incentives" -> people respond to economic incentives !
induces someone to act!
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3) "marginal" -> optimal choices or decisions are at the margin!
margin - eect of a small change in 1 variable on another variable!
rational people think at the margin!
ex: marginal cost - the additional cost for the production of an additional unit!
marginal benefit - the additional benefit from consuming an additional unit!
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rational people think at the margin, continue activity as long as MB > MC (cost benefit analysis)!
they stop when MB=MC!
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III. Questions that every society must answer !
1) Central questions (4)!
what? -> what goods and services a society should product, important because of scarcity,
have to make a choice!
tradeos -> decision to do something is a decision not to do something else!
opportunity cost -> value of what is given up to get something else!
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how? -> how should goods and services be produced as eciently as possible!
eciency -> at least possible cost!
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for whom? -> who should receive the goods and services!
distribution question!
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now vs. future!
now or future generation!
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economic growth!
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2) Dierent Economies!
centrally planned economy !
govt decides what, how, for whom, and now vs. future!
central planner decides production!
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market economy -> individuals and firms answer the central questions, through interaction
they decide, supply and demand decides!
demand and supply dictates production at the least possible cost!
interaction of individuals and businesses will help answer these questions!
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mixed economies -> have factors of centrally planned economies as well as market economies!
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3) Eciency of Market Economies
market economies are more ecient!
2 concepts !
productive eciency - producing goods and services at lowest possible cost!
allocative eciency - production that is consistent with economic preferences, MB=MC!
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IV. Models in Economics!
economists use models to optimize decisions!
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1) Model - highly simplified version of reality!
purpose - explain relationships/patters/behaviors!
helps us make better decisions, models must be !
simple!
make assumptions!
key variables!
ex: supply and demand, PPF, aggregate supply and demand!
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economists use the scientific method!
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Positive vs. Normative economics!
normative economics - the study of what ought to be, not based on scientific method but
personal judgement, can't be tested!
positive economics - the study of what actually is, based on scientific method, can be
tested against data!
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V. Micro vs. Macroeconomics!
micro - the study of the behavior of economics units!
macro - the study of the economy as a whole, economic aggregates, behavior of economic
aggregates (totals)!
combination of all markets!
!
GDP, price level -> inflation - increase in the price level!
employment, unemployment!
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