ECON101 Study Guide - Fall 2018, Comprehensive Midterm Notes - Marginal Cost, Demand Curve, Opportunity Cost
12 Oct 2018
School
Department
Course
Professor
ECON101
MIDTERM EXAM
STUDY GUIDE
Fall 2018
Microeconomics Lecture 1:
• Scarcity - situation in which unlimited wanted exceed the limited resourced available to meet those
wants
• Economics - study of choices people make to attain their goals, given scarce resources
• Economic models - economists study decisions making with economics models (simplified versions
of reality)
• Microeconomics - studies how households and firms make choices, their interaction in markets, and
how the government aims to influence their choices
• Macroeconomics - studies the economy as a whole, including topics such as inflation,
unemployment, and economic growth
3 Key Economic Ideas
1. 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
Ex: Market for snickers bars, market for college degrees
In analyzing markets, we generally assume:
1. People are rational
2. People respond to economic incentives
3. Optimal decision are made at the margin
Economists generally assume that people are rational
Rational - means people are using all available information to achieve their goals
Rational consumers and firms weigh the benefit and costs of each action, and try to make the best
decision possible
EX: Apple doesn't randomly choose the price of the iPhone; it chooses the prices that it thinks will be
most profitable
2. People respond to incentives
As incentives change, the actions that people will take change
Margin - “An extra amount of something that can be used if it is needed”
Marginal - in economics, marginal means additional, a little bit more (less), of an economic variable
find more resources at oneclass.com
find more resources at oneclass.com
3. Optimal decision are made at the margin
While some decision are all or nothing, most decisions involve doing a little more or a little less of
something
EX: Should you spend an extra hour on social media feeds, or study instead?
Economists think of decisions in terms of the marginal costs (MS) and marginal benefit (MB): the
additional cost (benefit) associated with a small amount extra of some action
Comparing MC and MB is known as marginal analysis
10 Principles of Economics:
1. People face tradeoffs
2. The costs of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Government can something improve market outcomes
In a world of scarcity, we have limited economic resources to satisfy our desires
- Therefore, we face that, because of scarcity, producing more of one good or service
means producing less of another good or service
Trade-off - The idea that, because of scarcity, producing more of one good or service means producing
less of another good or service
1. What goods and services are being produced
Individuals, firms, and governments must decide on the goods and services that
should be produced
An increase in the production of one requires the reduction in the production of some
other good. This is a trade-off, due to scarcity of the productive resources
Every activity has an opportunity cost - the highest valued alternative given up in order
to engage in some activity
EX: Ben considers going to the Coldplay concert in Washington, DC. A ticket costs $100. If Ben does
not go to the concert he could earn $80 working at the craft store during the same time. He could also
watch TV earning $0.
Ben’s opportunity cost of going to the concert is - $80
His economic cost is of going to the concert is - $180
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
3 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. Ex: market for snickers bars, market for college degrees. In analyzing markets, we generally assume: people are rational, people respond to economic incentives, optimal decision are made at the margin. Rational - means people are using all available information to achieve their goals. Rational consumers and firms weigh the benefit and costs of each action, and try to make the best decision possible. Ex: apple doesn"t randomly choose the price of the iphone; it chooses the prices that it thinks will be most profitable: people respond to incentives. As incentives change, the actions that people will take change. Margin - an extra amount of something that can be used if it is needed .
