ECON 1000 Study Guide - Spring 2018, Comprehensive Midterm Notes - Capitalism, Soviet Union, Process Flow Diagram
ECON 1000
MIDTERM EXAM
STUDY GUIDE
Fall 2018
Chapter 1
1. What is it?
a. Social science—focuses on how people behave and interact with each other
b. 3 fundamental ideas
i. Economics: social science that studies how people make decisions in the
face of scarcity and the impact those decisions have on society and
individuals
1. Scarcity: unlimited wants vs. limited resources (e.g. time, personal
income, amount of labor—available in finite or limited resources)
2. Tradeoffs: more of 1 item means getting by with less than
something else
a. We are making the conscious decision to have less of
something else
3. Microeconomics: study of how individual decision-makers behave
and interact with each other
a. Focus is on households and firms
4. Macroeconomics: study the functions/performance of a society’s
economy as a whole
a. Focuses on aggregate measures as the unemployment
rate, inflation rate, and GDP
ii. Positive statements vs. normative statements
1. Positive statements: factual; describe how the world is; data,
research, and evidence can be shown to determine if true or false
a. Example: Ronald Reagan was the oldest to ever hold office
(77 yrs/11 months/15 days on last day in office)—you can
look it up and see that it’s true
2. Normative statements: opinion based; can never be proven true
or false, no matter how much research, evidence, and data is
gathered
a. Example: President Reagan was the greatest
iii. Modeling human behavior
1. Focuses on rational decision makers (someone with a well-defined
goal who takes actions to achieve those goals)
2. Typically both costs and benefits are associated with different
actions
3. Cost-benefit principle: a rational decision maker should undertake
an activity if and only if the marginal (or additional) benefit of
doing so is greater than the marginal cost of doing so
4. Total economic surplus: difference between total costs and total
benefits
5. Goal of economic surplus is the largest spread between the TB
and TC
6. Goal of cost benefit principle is achieved when MB ≥ MC
7. How rational people respond to incentives (incentive principle)
a. Incentives matter b/c the choices people make are highly
dependent upon benefits/costs
b. Incentive principle
i. If the marginal benefit of an activity increases, then
a rational person will engage in more of that
activity
ii. If the marginal cost of an activity increases, then a
rational person will engage in less of that activity
8. Impact of incentive principle on public policy
a. People change behavior in response to incentives
b. Public policies alter cost or benefits of actions
i. Lower cost or higher benefit associated w/a public
policy or law causes people to respond accordingly
9. Individuals are self-interested
a. Does NOT mean that the person cares only about
her/himself.
b. A self-interested person places more weight on his/her
own priorities rather than the priorities of others
