01:220:102- Midterm Exam Guide - Comprehensive Notes for the exam ( 16 pages long!)

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Published on 5 Oct 2017
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Rutgers
01:220:102
MIDTERM EXAM
STUDY GUIDE
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Economics: First Principles
- Understanding the principles of how individuals make choices
- Understanding how economies work through the interaction of individual choices
- A set of principles for understanding economy wide interactions
The ability to choose is at the heart of economics
The Role of Economics Participation
- Resource demander
- Resource supplier
Choices are necessary because resources are scarce
Resource: anything that can be used to produce something else
Scarce: when there is not enough of resource available to satisfy all the various ways a society
wants to use
The true cost of something is its opportunity cost
Opportunity Cost: the loss of potential gain when considering alternative costs
Determining Opportunity Cost
- Choose the alternative choice
- Calculate your potential benefits
- Opportunity Cost = Return of Most Lucrative Option - Return of Chosen Option
Accounting Cost vs. Opportunity Cost
Accounting Cost: a record of what happened to your total monetary asset
Opportunity Cost: a record of resources you lost or saved
Trade Off: comparison of the costs and the benefits of doing something
Incentive: anything that offers rewards to people who change their behavior
Marginal decision: decision made at the margin of an activity about whether to do a bit more or a
bit less of that activity
Marginal analysis: the study of marginal decisions
People usually respond to incentives exploiting opportunities to make themselves better off
Specialization: the situation in which each person specializes in the task that he or she is good at
performing
Trade allows us all to consume more than we otherwise could
Markets move toward equilibrium
Equilibrium: an economic situation in which no individual would be better off doing something
different
Resources should be used efficiently to achieve society's goals
Efficient: taking all opportunities to make some people better off without making other people
worse off
Equity: a condition in which everyone gets his or her fair share
Markets usually lead to efficiency
People normally take opportunities for mutual gain
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When markets don't achieve efficiency government intervention can improve society’s
welfare
Sometimes markets fail and need correction
One person's spending is another person's income
Overall spending sometimes gets out of line with the economy’s productive capacity
Government policies can change spending
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