[ECON 101] - Midterm Exam Guide - Ultimate 27 pages long Study Guide!

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ECON 101
MIDTERM EXAM
STUDY GUIDE
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Midterm 2 Review
Econ 101- Caldwell
Specialization and Trade
People tend to specialize (concentrating ones efforts in a specific activity or
field), especially when in large industrialized societies
Through specialization and trade we get an increases standard of living,
increased economic welfare, and make ourselves better off
Comparative Advantage
Heart of why we choose to specialize
Some can produce at a lower cost than others
Allows for specialization an gains from trade
Marginal Cost
Opportunity cost of producing an additional (incremental) unit of a good.
First producer has lowest MC.. why supply curves are upward sloping
Absolute Advantage
When one producer can produce more of a good than another producer in a certain
period of time
Comparative Advantage
When one producer can produce at a lower opportunity cost than another producer
The Key to specialization is each side producing according to their comparative
advantage.
Not how much one can produce that is important (AA) but opportunity cost of
production (CA) that matters for benefits from exchange to exist
Limitations on Specialization
Requires sufficient ability to produce to meet demand
o Absolute production levels
o Eventually higher cost countries/individuals may have to make up the
short fall (we cannot always satisfy the entire demand)
Transportation costs must be low enough to make specialization worthwhile
Specialization limited by extent of market
o Must be possible to exchange own production for that of another
o Large enough marker to consume goods being produced
o More likely to occur as population increases
o Big cities vs. rural cities.. Big cities you can find anything, there is
more specialization in big cities, more specific doctors etc.
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Production Possibilities Frontier (PPF)
Graphically represents the possible combinations of two goods that can be produced
with a given amount of resources/technology. Movement along the PPF shows the
trade offs that exist in production
-Typically not straight but bulged outward (due to increasing
opportunity costs)
Three concepts illustrated are: efficiency, opportunity cost, growth
Efficiency
Efficient in Production:
No way to produce more of one good without producing less of another
All points on the PPF are efficient
Inside PPF- feasible, inefficient
Outside PPF- not feasible
Efficient in Allocation-
Allocation resources so that consumers are as well off as possible
All points on PPF may not be equally desirable
What consumers actually want.. what combination of corn and wheat do
consumers want?
Opportunity Cost
Slope of PPF is the Opportunity Cost of producing the good on the horizontal axis
measured in terms of the good on the vertical axis
How many units of Good Y must be given up in order to produce one more
unit of Good X?
Constant Opportunity Cost
= PPF is a straight line
= Opportunity cost of production does not change as production increases
Increasing Opportunity Cost
=PPF bowed outward
= Opportunity cost of production increases as production increases
o reflects specialization
o as more is produced, less suitable resources are being used in production (if
we want more apples, we have to divert more resources to do this. )
o resources are not easily transferrable between production of goods
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