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Complete Study Guide for Exam 1 (got 92%)

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ECO 211
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Econ 211 Exam 1: Ch.1 Economics: the study of how society manages its scares resources (limited) *How People Make Decisions* Principle 1: people face trade-offs • To do more of 1 thing and do less of another • Society faces a trade-off between efficiency and equality o Efficiency: property of society getting the most it can from its scarce resources o Equality: the property of distributing economic prosperity uniformly among the members of society (equity) • Ex. Gov’t faces a trade-off between guns and butter o Guns = needed for defense o Butter = public works/research/development Principle 2: the cost of something is what you have to give up to get it • Opportunity cost: whatever must be given up to obtain some item Principle 3: rational people think at the margin • Rational people: people who systematically/purposefully do the best they can to achieve their objectives • Marginal change: small incremental adjustment to a plan of action • Weigh the incremental benefits and costs of any decision • Marginal benefit > marginal cost • When MB = MC – stop action • When MC > MB – reverse action Principle 4: people respond to incentives • Incentive: something that induces a person to act • Ex. a tax on gasoline encourages people to buy smaller, more fuel-efficient cars *How People Interact* Principle 5: trade can make everyone better off • Trade can make countries better off Principle 6: markets are usually a good way to organize economic activity • Market economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services Principle 7: government can sometimes improve market outcomes • Government can intervene when the market fails • Property rights: the ability of an individual to own and exercise control over scarce resources (the government, in this case) • Market failure: a situation in which a market left on its own fails to allocate resources efficiently o 3 reasons markets fail: 1. Market power: the ability of a single economic actor (or small group) to have a substantial influence on market prices – ex. monopolies/oligopolies and monopsony – one large firm, one buyer – ex. tanks sold to the gov’t 2. Externality: the impact of one person’s actions on the well-being of a bystander 3. Asymmetric information: when one person knows more than another *How the Economy as a Whole Works* Principle 8: a country’s standard of living depends on its ability to produce goods and services • Standard of living: GDP per capita (income per worker) • Productivity: quality of goods/services produced per unit of labor o productivity = GDP per capita o Political stability, education (key to go from stagnation to growth), infrastructure, health, geo-political history Principle 9: prices rise when the government prints too much money • Inflation: an increase in the overall level of prices in the economy Principle 10: society faces a short-run trade-off between inflation and unemployment • money spending firms outputhiringunemployment o When you $, prices are sticky o Business cycle: fluctuations in economic activity, such as employment and production Ch. 2: • Economists think like scientists o Employ the scientific method o Use their own language o Do it with models  Use them to answer questions/explain reality  Models are simplifications of reality – make assumptions to simplify reality  Making the right assumptions is the art of scientific thinking Models: • Circular Flow Diagram: shows how dollars flow through markets along households and firms • Firms, households, goods/services, factors of production (inputs, land, location, workers, equipment, entrepreneurial mind) • PPF – Production Possibilities Frontier o Shows the combination of output that the economy can possibly produce given the available factors of production and the available production technology (the combination of goods/services an economy can produce in a given time) o Slope of PPF = opportunity cost o Preference economy: determines which is better Ch. 4: Market: a group of buyers and sellers of a particular good or service • Markets can take on many forms o Monopolies (cable), oligopolies (Cola/Pepsi, Apple/Microsoft), duopolies, monopolistic competition Competitive Market: a market in which there are so many buyers and sellers so that each has a negligible impact in the marketplace (not one has significant influence) • Buyers/sellers are price takers – they must accept the price that the market determines Demand curve: shows the relationship between the price and quantity demanded Quantity demanded: the amount of a good that buyers are willing and able to purchase Law of demand: the claim that, other things equal, the quantity demanded of a good falls when the price of a good rises (negative relationship, negative slope) Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded • Change in price does not change demand – it changes quantity demanded Things that change demand: (determinants) 1. Income: if income  then demand  for normal goods (cars, steak) shifts R If income  then demand  for inferior goods (bus/Ramen) shifts L 2. Related Goods:  D of good,  D for substitute OR  D for complement a. Substitute: two goods for which an increase in the price of one leads to an increase in the demand for the other (hot dogs and hamburgers, movie tickets and DVD rentals) b. Complement: two goods for which an increase in the price of one leads to a decrease in the demand for the other (gasoline and automobiles, peanut butter and jelly) 3. Tastes and Preferences 4. Expectations: demand today will rise if the price is expected to rise tomorrow 5. Number of Buyers: market demand is the horizontal sum of individual demand curves a.  # of buyers leads to an  in demand Law of Sup
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