[ECON 201] - Midterm Exam Guide - Comprehensive Notes for the exam (41 pages long!)

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6 Feb 2017
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ECON 201
MIDTERM EXAM
STUDY GUIDE
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Econ 201 Lecture 1 Principles of Macroeconomics
Principles of Individual Choice
There are scarce resources
o Land, labor, time, physical capital, human capital
o These are all inputs
o Scarce means that we don’t have enough for every possible thing we
might want
Thus, there are opportunity costs
o What you give up to get something
o There are trade offs
Recall that principle 3 says that trade offs are marginal
Recall that principle 4 says that people will choose wisely and
respond to incentives
Gains from trade through specialization
Markets will move towards the equilibrium
o This is where the market clears
o Everything that is produced is bought
o This is the most efficient point
o Competitive markets are usually efficient, and if they aren’t, governments
can help
Ceteris Paribus assumption
o “all else equal”
o Assume that everything not in the model stays unchanged
o This is the assumption we use for economics
Circular-Flow Diagram
Google “circular-flow diagram” to see diagram
Very simple model of transactions
o Keep in mind this is missing a lot of things
2 groups
o Households
o Firms
meet in 2 places
o factor markets
o goods markets
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What’s going on?
o Households trade with firms in the factor market
Sell their labor in exchange for money (wages)
o Consumers trade with firms in the goods market
Sell their money in exchange for goods (pay for goods)
The factor markets determine the economy’s income distribution
o How total income is divided among the owners of the various factors of
production
PPF (Production Possibilities Frontier)
shows maximum quantity of one good that can be produced at any given quantity
of the other good
shows trade-offs that an economy faces while producing 2 goods
feasibility and efficiency:
o any point on the curve = feasible & efficient
o any point inside curve = feasible & inefficient
o any point outside curve = not feasible
we can use the PPF to think about growth and trade
economic growth shifts PPF outward
o be careful! Sometimes it will only shift one intercept (read question
carefully)
trade:
o absolute advantage = who can produce more given input
o comparative advantage = who has the lower opportunity cost
o specialize in comparative advantage
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