[ECON 2105H] - Midterm Exam Guide - Ultimate 15 pages long Study Guide!

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ECON 2105H
MIDTERM EXAM
STUDY GUIDE
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Tradeoffs
Using an economic model
Models are used to visually represent or simplify reality (in economics, they are
often mathematic equations)
Production Possibility Frontier (PPF)
Scarcity tells us:
o To increase production of one good, we must decrease production of
something else
Assume:
o Full employment
o Fixed technology
o Only two goods
Example:
Production
Possibility
National
Security
(million
servicemen)
Health
Care
(trillion
$)
A
0
15
B
1
14
C
2
12
D
3
9
E
4
5
F
5
0
If a PPF is bowed out, it means the ratio of x to y tradeoff is not 1:1
o Not all resources are equally suited to every job
o Diminishing marginal returns
o Marginal cost is increasing
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Marginal cost: the opportunity cost of producing one more of a good
If a PPF is linear, it means the ratio of x to y tradeoff is 1:1
o Marginal cost is constant
PPF’s illustrate:
o Choice (produce at point A or point B?)
o Production efficiency (producing at any point on the curve)
o Ueployet ad iefficiecy (if you do’t use all of your
resources; producing inside the PPF)
o Scarcity (unattainable points)
o Growth (PPF shifts outward)
Allocative Efficiency: the point where we cannot produce more of one good
without giving up some other good that provides greater benefit (which
point is best)
Diminishing Marginal Benefit/Utility
Each additional unit of product has less value to a consumer
Creates downward sloping curve
Where MC > MB, you want to consume less
Where MC < MB, you want to consume
more
Where MC = MB, you are at the efficient
point. No other allocation can take place that
will make people better off
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