[01:220:102] - Midterm Exam Guide - Everything you need to know! (36 pages long)

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Published on 5 Oct 2016
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Rutgers
01:220:102
MIDTERM EXAM
STUDY GUIDE
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PRINCIPLES THAT UNDERLIE
INDIVIDUAL CHOICE: THE CORE OF
ECONOMICS
1. PRINCIPLE 1: CHOICES ARE NECESSARY BECAUSE RESOURCES ARE
SCARE
A. A resource is anything that can be used to produce something.
B. A resource is scarce when there’s not enough of the resource available to satisfy all the
ways a society wants to use it.
B.i. Americans have only so many hours left in the week after work. Would they rather go to
a cheaper supermarket or a higher priced convenience store? It all differs based on the
person you’re asking
2. PRINCIPLE 2: THE TRUE COST OF SOMETHING IS ITS OPPORTUNITY
COST
A. The opportunity cost of an item is what you must give up in order to get it, thus its true cost.
A.i. Tuition and housing are major monetary expenses for most students; but even if these
things were free, attending college would still be an expensive proposition because most
college students, if they were not in college, would have a job. That is, by going to
college, students forgo the income they could have earned if they had worked instead.
This means that the opportunity cost of attending college is what you pay for tuition and
housing plus the forgone income you would have earned in a job.
3. PRINCIPLE 3: HOW MUCH IS A DECISION AT THE MARGIN
A. A tradeoff is a comparison of costs and benefits.
A.i. Suppose you are taking both economics and chemistry. And suppose you are a pre-med
student, so your grade in chemistry matters more to you than your grade in economics.
Does that therefore imply that you should spend all your study time on chemistry and
wing it on the economics exam? Probably not; even if you think your chemistry grade is
more important, you should put some effort into studying economics. Spending more
time studying chemistry involves a benefit (a higher expected grade in that course) and
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a cost (you could have spent that time doing something else, such as studying to get a
higher grade in economics).
B. Marginal Decisions are about whether to do a bit more or a bit less of an activity. The
study of such decisions is known as marginal analysis.
B.i. Many of the questions that we face in economics—as well as in real life—involve
marginal analysis: How many workers should I hire in my shop? At what mileage should
I change the oil in my car? What is an acceptable rate of negative side effects from a new
medicine?
4. PRINCIPLE 4: PEOPLE USUALLY RESPOND TO INCENTIVES,
EXPLOTINNG OPPORTUNITIES TO MAKE THEMSELVES BETTER OFF
A. An incentive is anything that offers rewards to people who change their behavior.
A.i. If the earnings of those who get MBAs soar while the earnings of those who get law
degrees decline, we can expect more students to go to business school and fewer to go
to law school. If the price of gasoline rises and stays high for an extended period of time,
we can expect people to buy smaller cars with higher gas mileage—making themselves
better off in the presence of higher gas prices by driving more fuel-efficient cars.
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