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ECON 101 Study Guide - Comprehensive Final Guide: Price Ceiling, Marginal Revenue, Economic Equilibrium


Department
Economics
Course Code
ECON 101
Professor
Ronald C Caldwell
Study Guide
Final

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U of M
ECON 101
FINAL EXAM
STUDY GUIDE

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1/6 Lecture
Economics is a social science that deals with study of human decision making given a set of
constraints
oHow we decide to allocate our resources given that we have limited amount of
resources
Economics is the study of the allocation of scarce resources over competing and alternative uses
Allocation: what we choose to use resources for, who gets what, how distributed
Scarce: not enough to go around, more wants than availability
Resources: land, labor, capital, time
Positive vs normative economics
oPositive- branch of economic analysis that describes the way the economy actually
works (objective analysis, what is, provable facts, testable hypothesis). What you expect
to happen as a result of something, say what will occur not if good or bad
oNormative is more of your opinion of what will happen. Tells you if you should do
something or not.
Economics is to help us predict what might happen when certain actions occur (positive), not
what should happen (normative)
oEconomics describes the trade-offs, which occurs in every action
Opportunity cost- the value of the next best alternative. Different for each person even in same
situation
All costs are opportunity costs! (buying TV- money, going to class- time, concert ticket- time and
selling price)
1/11 Lecture
Basic approach of economics
oGenerate intuitive theory about how individuals behave
oUse theory to build a formal model that allows for hypotheses to be made
oTest model to determine if predictions supported by real world observation
Can’t prove model is “correct”, can only support
Models are simplified abstractions because real world too complex, focus on important details
Other things held constant assumption (ceteris paribus)
oTo establish causal relationship
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What does model demonstrate
oProvides prediction on what is likely to happen if certain actions are taken
Positive economics
What is likely to occur
Objective, testable predictions
oDoes not tell us what we should do (normative economics)
Postulates of human behavior
oSet of ideas about human behavior derived from observation
oPeople have preferences
Given a choice between goods, consumers can make a decision about which is
preferred
oPreferences can and do differ across individuals
Allows for trades to occur
oMore is preferred to less
Humans wants are insatiable
Refers to all goods not individual goods (if keep giving Pepsi, will eventually get
sick of it, hence not individual goods)
oPeople are willing to substitute one good for another
Willing to make trade-offs
oThe more we have of a good, the less we value an additional unit of that good
Demand curve
oDemand schedule
Table showing how much of a good or service consumers will want to buy at
different price
oDemand curve
Graphical representation of demand schedule (skewed to the right)
Negative linear relationship. Price y-axis, quantity x-axis. However, price is
independent variable and quantity is dependent variable
Law of Demand
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