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ECON 160 Study Guide - Comprehensive Midterm Guide: Sunk Costs, Invisible Hand, Absolute Advantage


Department
Economics
Course Code
ECON 160
Professor
Susan W.Hanes
Study Guide
Midterm

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Binghamton
ECON 160
MIDTERM EXAM
STUDY GUIDE

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ECON 160 – Lecture 1 – What is Economics?
The Basic Problem
how to allocate in the presence of scarcity
this is the basis of what economics studies
if there is no scarcity, there is no need for economic principles
everyone faces scarcity in terms of time – no matter the money someone has,
there is always a limited amount of time
human greed/want never stops
the means to satiate wants are scarce
The Basic Assumptions
Agents choose what is in their best interest
Rational
the group, the average rather than one individual
Greedy – always want more
goods and services
Informed about your options
not always the case in individual situations
10 Basic Principles (1-5)
1. People face tradeoffs
a. due to scarcity
b. no scarcity = no tradeoff
2. The cost of something is what you give up to get it
a. “opportunity cost”
i. whatever is given up to get something
ii. ex. college athletes can drop out of school to play professionally,
potentially earning millions; opportunity cost of college is very high
b. money is a “numeraire”
i. we can talk about money representing other items – money can be
translated into all things you buy
c. the best alternative
3. Rational people think at the margin
a. take where we are and go from there
b. marginal changes
i. small adjustments to your plan
ii. the decision is not between watching TV or studying for 24 hours,
but rather if you should spend an extra hour studying instead of
watching TV
iii. when deciding how many years to stay in school, comparing the
lifestyle of a grade-school dropout and someone with a PhD is not
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helpful, but the marginal costs
and marginal benefits
or an extra
year or two can help you decide
c. ignore sunk costs
i. decision to pay tuition vs. decision to attend class
ii. if you’ve already pay tuition, then you have to make the decision
every time you have the class
iii. tuition is a sunk cost
since you can’t get it back
d. ignore irrelevant alternatives
e. the margin – everything that affects your decision, the edge
4. People respond to incentives
a. best way to attempt to control another person’s behavior
b. incentive to do your own homework – plagiarism is given a zero
c. price is incentive – invisible hand
d. when the costs or the benefits are altered, their behaviour might be as well
e. ex. gasoline tax
i. people would be encouraged to drive smaller and more efficient
cars
ii. encourages public transportation instead of using their cars
iii. might start driving electric cars
5. Trade can make everyone better off
a. Robinson Crusoe economy
i. one where only one person is in the economy
ii. can be thought about tangibly
iii. needs
1. food
2. shelter
3. fresh water
iv. everything done by an individual, one person providing and
consuming all services
1. has to be a jack-of-all-trades
a. be able to hunt, build things, etc.
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