ECON 101 Study Guide - Midterm Guide: Demand Curve, Economic Equilibrium, Absolute Advantage

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11 Oct 2016
Chapter Summaries
Chapter 1
The principles of decision making are:
People face tradeoffs.
The cost of any action is measured in terms of foregone opportunities.
Rational people make decisions by comparing marginal costs and marginal benefits.
People respond to incentives.
The principles of interactions among people are:
Trade can be mutually beneficial.
Markets are usually a good way of coordinating trade.
Govt can potentially improve market outcomes if there is a market failure or if the market
outcome is inequitable.
The principles of the economy as a whole are:
Productivity is the ultimate source of living standards.
Money growth is the ultimate source of inflation.
Society faces a short-run tradeoff between inflation and unemployment.
Chapter 2
As scientists, economists try to explain the world using models with appropriate
Two simple models are the Circular-Flow Diagram and the Production Possibilities
Microeconomics studies the behavior of consumers and firms, and their interactions in
markets. Macroeconomics studies the economy as a whole.
As policy advisers, economists offer advice on how to improve the world.
Chapter 3
Interdependence and trade allow everyone to enjoy a greater quantity and variety of
goods & services.
Comparative advantage means being able to produce a good at a lower opportunity cost.
Absolute advantage means being able to produce a good with fewer inputs.
When people—or countries—specialize in the goods in which they have a comparative
advantage, the economic “pie” grows and trade can make everyone better off.
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