ECON 1 Study Guide - Comprehensive Midterm Guide: Absolute Advantage, Historical Cost, Economic Surplus

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Published on 6 Feb 2017
School
Department
Course
UCSD
ECON 1
MIDTERM EXAM
STUDY GUIDE
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Thinking like an Economist
Food for thought:
How many students are there in your econ class?
What size is best?
If cost doesn't matter = 1 student per teacher.
But cost does matter.
“There is no such thing as free lunch”
Cost of 1 student per teacher vs cost of 300 students per teacher
(Economic) Trade Off
Ex: An increase in class size= reduce cost per student (good)
= reduce quality of class (bad)
Scarcity = wants and needs are unlimited but resources are limited.
*Allocation of resources happens when resources are scarce.
*This is why a trade off happens.
More of one thing = less of another.
Cost-Benefit Principle
One way to resolve a trade off is to use the cost-benefit principle.
-One should take an action if and ONLY IF the extra benefit associated with that action
exceeds the extra cost.
*We want to assume that agents making the decision are being rational*
(The following concepts will be based on this scenario)
Question: Should you walk downtown to save $10 on a video game?
Action: Walk downtown
Extra benefit: Save $10
Extra cost: 30 minute walk (But can we assign a monetary value to this cost?)
Opportunity Cost = The next best alternative decision/action forgone.
So, the 30 minute walk could have been -> the only time to study for an exam
-> give up a $20 job
Which would you forego?
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*Opportunity cost is different from accounting cost*
Ex: If you have an empty apartment unit, letting your friend stay there for free would
have no accounting cost, but there is an opportunity cost. Why?
-You could’ve rented that apartment unit to someone else for $1000, hence, by letting
your friend stay there for free, you give up $1000. (OC)
-You aren’t actually paying $1000. (AC)
Economic Surplus
Suppose that the cost of walking for 30 minutes is $9…
And you save $10 by walking there...
There is an economic surplus because $10-$9 = $1
Normative vs Positive Statements/Principles
Normative: How you should behave
Positive: Description of behaviour
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Document Summary

If cost doesn"t matter = 1 student per teacher. There is no such thing as free lunch . Cost of 1 student per teacher vs cost of 300 students per teacher (economic) trade off. Ex: an increase in class size= reduce cost per student (good) Scarcity = wants and needs are unlimited but resources are limited. *allocation of resources happens when resources are scarce. More of one thing = less of another. One way to resolve a trade off is to use the cost-benefit principle. One should take an action if and only if the extra benefit associated with that action exceeds the extra cost. *we want to assume that agents making the decision are being rational* (the following concepts will be based on this scenario) Extra cost: 30 minute walk (but can we assign a monetary value to this cost?) Opportunity cost = the next best alternative decision/action forgone.

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