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ECON101 Study Guide - Comprehensive Midterm Guide: Mixed Economy, Allocative Efficiency, Planned Economy

23 pages63 viewsFall 2016

Department
Economics
Course Code
ECON101
Professor
Schubert, Jens
Study Guide
Midterm

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UD
ECON101
MIDTERM EXAM
STUDY GUIDE
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Chapter 1 – Economics: Foundations and Models
Outlook
1.1 Three key economic ideas
1.2 Economic problem that every society must solve
1.3 Economic models
1.4 Microeconomics vs. Macroeconomics
1.5 Some Important Economic Terms (Read on your own)
Appendix using Graphs and Formulas
Recap
People make choices as they try to achieve their goals. Choices are inevitable because we
live in a world of scarcity
Scarcity – a situation in which unlimited wants exceed the limited resources available to
meet those wants
Economics is the study of the choices people make to attain their goals, given their scarce
resources
Economists study decision making with the help of economic models, which are simplifies
versions of reality
1.1 Three Key Economic Ideas
We interact with one another in markets
Market – A group of buyers and sellers of a good or service and the institution by which
they come together to trade
oExamples – market for snickers bars, market for college degrees
oIn analyzing markets, we generally assume,
People are rational
People respond to incentives
Optimal decisions are made at the margin
People are Rational
Economists generally assume that people are rational
Rational – using all available information to achieve your goals
Rational consumers and firms weigh the benefits and costs of each action, and try to make
the best decision possible
Example – Apple doesn’t randomly choose the price of the iPhone; it chooses the price(s)
that it thinks will be most profitable
People Respond to Incentives
As incentives change, the actions that people will take change
oExample – changes in several factors have resulted in increased obesity in Americans
over the last couple of decades, including:
Decreases in the price of fast food relative to healthy food
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More attractive non-physical entertainment options
Increased availability of health care and insurance, protecting people against
the consequences of their actions
Optimal decisions are made at the margin
Margin
oA border or edge
oAn extra amount of something that can be used if it is needed
Marginal
oPertaining to a margin
oVery slight or small
In economics, marginal means additional, a little bit more (less), of an economic variable
While some decisions are all-or-nothing, most decisions involve a little more or a little less
of something
oExample – should you spend an extra hour on social media feeds, or study instead?
Economists think of decisions in terms of the marginal cost and marginal benefit (MC &
MB): the additional cost or benefit associated with a small amount extra of some action
Comparing MC and MB is known as marginal analysis
1.2 The Economic Problem That Every Society Must Solve
In a world of scarcity, we have limited economic resources to satisfy our desires
oTherefore, we face trade-offs
Trade-off – the idea that, because of scarcity, producing more
o1. What goods and services will be produced?
Individuals, firms, and governments must decide on the goods and services
that should be produced
An increase in the production of one good requires the reduction in the
production of some other good. This is a trade-off, due to scarcity of
productive resources
oEvery activity has an opportunity cost – the highest-valued alternative given in order
to engage in some activity
EXAMPLE – copy after class
o2. How will the goods be produced?
A firm might have several different methods from producing its goods and
service
Example – the wage rate of baristas goes up, a small coffee shop
might respond by
oAdjusting its production technique (coffee making) to one that
employs more automated machines and fewer baristas (less
fancy froth patterns)
o3. Who will receive the goods and services produced?
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