ECON 201 Study Guide - Midterm Guide: Pareto Efficiency, Allocative Efficiency, Marginalism

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11 Apr 2018
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Scarcity: unlimited wants exceed the limited resources available to fulfill those wants
Economics: study of the choices people make to attain goals given their scarce resources
Market: a group of buyers and sellers who come together to trade
Economic assumptions:
1. People are rational
2. People respond to incentives
3. Optimal decisions are made at the margin
Marginal analysis: involves comparing marginal benefits and marginal costs
Trade-off: producing more of good or service means producing less of another
What goods will be produced
How will the goods be produced
Who will receive the goods
Opportunity cost: highest- valued alternative that must be given up to engage in an activity
Possible price is between opportunity costs
Centrally planned economy: the government decides how economic resources will be
allocated
Market economy: decisions of households and firms interacting in markets allocate economic
resources
Mixed economy: most economic decisions result from the interaction of buyers and sellers in
markets but in which the government plays a significant role in the allocation of resources
Efficiency:
Productive efficiency: good or service produced at the lowest possible cost
Allocative efficiency: production is in accordance with consumer preferences; every
good or service is produced up to the point where the last unit provides marginal benefit
to society equal to marginal cost of producing it
Voluntary exchange: the buyer and seller of a product are made better off by the
transaction
Economic efficiency: market outcome in which the marginal benefit= marginal cost and
CS and PS are at a maximum
**allocation or resources is efficient if no one can be made better off without someone
being made worse off
Pareto efficiency: there's no way to get more of one thing without giving up something
else
Positive analysis: “what is”
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Normative analysis: what ought to be
Macroeconomics: study of economy as a whole (inflation, unemployment, economic growth)
Microeconomics: how households and firms make choices, how they interact in markets, and
how government attempts to influence their choices
Households: suppliers of factors of production (labor) and demand goods and services
produced by firms and governments
Factors of production/ economic resources/ inputs: labor, capital, natural resources, and
ability
Capital:
Financial: stocks, bonds
Capital: manufactured goods used to produce other goods
Human: training and skills
Production possibilities frontier: curve showing the maximum attainable combination of two
goods that can be produced with available resources and current technology
As you move down the production possibilities frontier → increasing marginal opportunity
cost
Slope of PPF= opportunity cost
Economic growth: ability of economy to increase production of goods and services
Absolute Advantage: ability to produce more of a good or service than competitors using the
same amount of resources
Comparative advantage: ability to produce a good or service at a lower opportunity cost than
competitors
Product market: market for goods or services
Factor market: market for factors of production
Circular Flow Diagram
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