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[ECON 101] - Midterm Exam Guide - Everything you need to know! (21 pages long)


Department
Economics
Course Code
ECON 101
Professor
Mitchell Dudley
Study Guide
Midterm

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U of M
ECON 101
MIDTERM EXAM
STUDY GUIDE

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Introduction
The Invisible Hand
economy- a well functioning system for coordinating productive activities -- the activities that
create the goods and service people want and get them to the people that want them
economics- the social science that studies the production, distribution, and consumption of
goods and services
an economy succeeds to the extent that it delivers the goods
market economy- production and consumption are the result of decentralized decisions by
many firms and individuals
there is no central authority telling people what to produce or where to ship it
each individual producer makes what he or she thinks will be the most profitable; each
consumer buys what he or she chooses
command economy- there is a central authority making decisions about production and
consumption
invisible hand- the way a market economy manages to harness the power of self-interest for
the good of the society
by acting upon one's own self interest, by coincidence you also attend to the needs of
the society
Adam Smith said individuals pursuing their own interests often do promote the interests
of society as a whole
microeconomics- the study of how individuals make decisions and how these decisions
interact
market failure- when acting on one's own interests does not coincide with the interests of
society
an example of market failure is traffic congestion
when traffic is congested, each driver is imposing a cost on all the other drivers
on the road -- literally getting in their way and vice versa
commuters do not take into account the costs they impose on other drivers when
they decide whether to drive or not
other examples of market failure are air and water pollution, overexploitation of
natural resources such as fish and forests
recessions- a downturn in the economy
macroeconomics- branch of economics that is concerned with overall ups and downs in the
economy
recessions are one of the main concerns of macroeconomics
over the long-run the story of the U.S. economy contains many more ups than downs
economic growth- the growing ability of the economy to produce goods and services
this means that over time the economy will always grow
Chapter 1: First Principles
Principles that Underlie Individual Choice: The Core of Economics
economic interaction- how my choices affect your choices, and vice versa
individual choice- decisions by an individual about what to do and what not to do
four economic principles underlie the economics of individual choice (#1-#4)
principle #1- people must make choices because resources are scarce
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resource- anything that can be used to produce something else
scarce- when there’s not enough of the resource available to satisfy all the ways society
wants to use it
some resources that are scarce:
time:
limited time affects people’s choices
convenience stores have higher prices but people still go there because
they value the time it would take them to find a cheaper alternative
income:
limited income affects people’s choices
people tend to not spend money if money is tight because it is a limited
resource
since resources are scarce, people are forced to make choices about what resources
they will expend
principle #2- the opportunity cost of an item--what you must give up in order to get it--is it's true
cost
opportunity cost- what you give up in order to get something
ex: going to college is an example of opportunity cost because if you were not in
college you could go out and get a job resulting in an income, whereas in college
you are not earning an income
money you have to pay for something, as well as the money or opportunities you
would have to forgo when purchasing/attending/doing something are all included
in the opportunity cost
principle #3- “How much” decisions require making trade-offs at the margin: comparing the
costs and benefits of doing a little bit more of an activity versus doing a little bit less
marginal decisions- decisions about whether to do a bit more or a bit less of an activity.
The study of such decisions is called marginal analysis
example of a decision at the margin: when studying for classes you decide how much
you study for one class over the other
trade off- a comparison of costs and benefits of doing something
you make these decisions one bit at a time
principle #4- people usually respond better to incentives, exploiting opportunities to make
themselves better off
incentive- anything that offers rewards to people who change their behavior
economists are skeptical of any attempt to change people’s behavior that does not
change their incentives
for example: telling a company to do something simply to improve the environment will
not work, there must be some sort of cash/social incentive offered by the government or
society
the principle that people will exploit opportunities to make themselves better off is the
basis of all predictions by economists about individual behavior
Interaction: How Economies Work
each individual’s makes his or her own choices
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