[ECON 101] - Midterm Exam Guide - Comprehensive Notes for the exam (13 pages long!)

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7 Feb 2017
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ECON 101
MIDTERM EXAM
STUDY GUIDE
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ECON 101 L1 Ten Principles of Economics Chapter 1
Free trade is good: allows us to produce things in the cheapest ways as possible, every
economist agrees
Remittances: term used for Mexican citizens who come, work in US and take a portion of the
money, and send it back to their families= government might charge people to send money
back to Mexico
What Economics is All About
- Econ is a social science: study human behavior
- Scarcity: liited ature of society’s resources, “carcity make choices
- Economics: study of how society manages its scarce resources, e.g.
o How people decide what to buy, how much to work, save and spend
o How firms decide how much to produce, or workers to hire
o How society decides how to divide its resources between national defense,
consumer goods, protecting the environment, and other needs
People Face Tradeoffs- Principle 1
- All decisions involve tradeoffs, e.g.:
o Going to party the night before midterm leaves less time for studying
o Having more money to buy stuff requires working longer hours, which leaves less
time for leisure
o Protecting the environment requires resources that could otherwise be used to
produce consumer goods
- Scarcity choices opportunity costs
The Cost of Something Is What You Give Up to Get it- Principle 2
- Making decisions requires comparing the costs and benefits of alternative choices
- Opportunity costs: of any item is whatever must be given up to obtain it, highest value
alternative foregone (not taken)
- Relevant cost for decision making
- E.g.: going to college for a year is not just the tuition, books, and fees, but also foregone
wages
o Seeing a movie is not just price of a ticket but the value of the time you spend in
the theater
Rational People Think at the Margin Principle 3
- Rational People- (rational): acting how we expect you to
o Systematically and purposefully do the best they can to achieve their objectives
o Make decisions by evaluating costs and benefits of marginal changes,
incremental adjustments to an existing plan
Incremental: one at a time
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ECON 101 L1 Ten Principles of Economics Chapter 1
Marginal changes: one additional
o goal= maximize utility, happiess
- Examples:
o When student considers whether to go to college for an additional year, he
compares the fees and foregone (sacrificed) wages to the extra income he could
learn with the extra year of education
o When a manager considers whether to increase output, she compares the cost
of the needed labor and materials to extra revenue
People Respond to Incentives Principles 4
- Decision Rule: if Marginal Benefit > Marginal Costs = DO IT
o if Marginal Benefit < Marginal Costs = DO NOT DO IT
- Incentive: something that induces a person to act, i.e.: prospect of a reward or
punishment
- Rational people respond to incentives
o Examples:
When gas prices rise, consumer buy more hybrid cars and fewer gas
guzzlig “UV’s
When cigarette taxes increase, teen smoking falls
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