[ECON101] - Midterm Exam Guide - Ultimate 47 pages long Study Guide!

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ECON101
MIDTERM EXAM
STUDY GUIDE
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Chapter 1: Economics Foundations and Models
What is Economics?
- The social science that examines the choices people make to attain their goals, given the scarce
resources. Decision making behavior how best to allocate scarce resources among competing
uses.
Understand the concept of opportunity cost and be able to identify opportunity cost in
given scenarios.
- Opportunity cost is the loss of potential gain from other alternatives when one alternative is
chosen (the stuff you gave up to do what you’re doing now). The highest value thing that you
could’ve done.
Identify Microeconomics vs. Macroeconomics questions and topics
-Micro: Study of decision making behavior of individual households and firms and how
government attempts to influence their choices. (parts of the large economy: individuals,
markets, firms, or industries). Includes topics such as how consumers react to changes in
product prices and how firms decide what prices to charge for the products they sell.
-Macro: study of decision making of economy as a whole (the entire economy:
households, businesses, or government). Includes unemployment, inflation, economic
growth.
Identify Positive vs. Normative Economic Statements
- Positive statements can be verified by facts. It’s analysis concerned with what is. For
example, “increasing the interest rate will encourage people to save.”
- Normative statements are value judgements or opinions. It is subjective and concerned with
what ought to be. For example, “pollution is the most serious economic problem.”
Understand the three (3) key economic ideas:
1) People are rational:
-decision making behavior is purposeful as there is a desired outcome in mind.
-Decisions are not random or chaotic (Note: does not mean people are perfect decision makers)
-Decisions based on rational self-interest (seek to increase satisfaction)
-Individuals seek to maximize their utility (the happiness or satisfaction obtained from
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consuming a good or service).
-Firms seek to maximize their profits
2) People respond to economic incentives
- factors that motivate you to act or to exert effort
- example: people in US got fat due to lower prices of fast food opposed to healthy food.
3) Marginal Analysis:
-Optimal decisions are made at the margin (youre making that decision from the current
point of time that youre in into the future). A change in current conditions and involve
doing a little more or a little less of something.
-example: should you watch an extra hour of TV, or study instead?
- Decisions made by comparing MB with MC
Do more if MB>MC; Do less if MC>MB; Stay if MB=MC
Understand the three (3) economic questions:
1)What to produce?
- The choices that individual firms, or governments make determine the goods and services that
should be produced. More military goods, consumer goods, capital goods? What type of goods
should we produce?
2) How to produce
- A firm might have several different methods for producing its good and services. What
production method are you going to use? Labor, factories, etc?
3) Who will receive the goods and services produced?
- How should we distribute the goods we produce? Who receives it? Higher income people?
Understand the different types of economy
1)centrally planned economy: An economy in which the government decides how economic
resources will be allocated. A lot of times they invest in military goods.
2)market economy: An economy in which the decisions of households and firms interacting in
markets allocate economic resources.
* more efficient than centrally planned economies
* promote productive efficiency and allocative efficiency
3)mixed economy: Mostly households and firms but government comes in sometimes. Mixture
of the previous 2 economies. An economy in which most economic decisions result from the
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