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