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Principles of Microeconomics Notes Part 1 - got a 90% on final exam

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ECO 2023
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EXAM 1 REVIEW SESSION Chapter 1: Scarcity- the concept that there is less of a good freely available from nature than people would like 8 guideposts to economic thinking: 1. Resources are scarce (no such thing as a free lunch). -the concept of opportunity cost 2. Individuals are rational (most benefit at the least cost) 3. Incentives matter 4. Individuals make decisions at the margin -marginal: effect of change in current situation (benefits and costs of one more) ex. Drive or fly ex. Supersizing your extra value meal * Cost-benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs* 5. Information helps us make better choices, but is costly 6. Beware of secondary effects: economic actions generate both direct and indirect effects 7. The value of a good or service is subjective 8. The test of a theory is its ability to predict Know the difference between a normative economic statement and a positive economic statement Ex. Positive- when the price of peanut butter increases, people tend to buy less peanut butter Normative- peanut butter is way too expensive Know the 4 pitfalls to avoid in economic thinking 1. Violation of ceteris paribus principle ceteris paribus: other things constant 2. Good intentions do not guarantee desirable outcomes ex. Endangered species act/safety caps on medicine ex. Nirvana fallacy and child labor/sweatshops 3. Association is not causation 4. Fallacy of composition: belief that what is true for one is true for all Ex. Standing at a football game Chapter 2: Know how trade creates value Know that middlemen support trade by reducing transaction costs Understand the process of wealth creation through voluntary transactions Know the four incentives of private property rights 1. Use the resource in ways that benefit others ex. Empty lot 2. Care for and manage what they own ex. Driving rental car vs. driving own car 3. Private owners have an incentive to conserve for the future ex. Tragedy of the commons 4. Private owners have an incentive to make sure their property doesn’t damage your property ex. Keeping your dog on leash What is the production possibilities curve (ppc) Be able to identify and describe points on a production possibilities curve (PPC) Inefficient: point inside of curve Efficient: point on the curve Unattainable: point outside of the curve Know shifters of PPC curve: 1. Change in the economy’s resource base 2. Changes in technology technology: the knowledge available in an economy at any given time 3. A change in the rules under which the economy functions 4. A change in work habits Know the law of comparative advantage and how it works: The total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowe
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