ECON 101 Study Guide - Midterm Guide: Air Traffic Control, Market Failure, Government Spending
Econ 101 Chapter 1 Reading Notes
All economic analysis is based on a set of principles that apply to many issues
Every economic issue involves individual choice- decisions by an individual about
what to do and what not to do
Choices are necessary because resources are scarce; ex. Limited income, time;
A resource is anything that can be used to produce something else ex. Land, labor;
A resource is scarce when there’s not enough of the resource available to satisfy all
the ways a society wants to use it; scarcity of resources means that society as a whole
has to make choices; overall choice= sum of individual decisions
Opportunity cost: what you must give up to get an item you want
The opportunity cost of an item-what you must give up in order to get it- true cost; all
costs are opportunity costs because every choice means forgoing an alternative
Much economic analysis involves no direct monetary cost
A trade-off is a comparison of costs and benefits
Decisions about whether to do a bit more or a bit less of an activity are marginal
decisions; the study of such decisions is known as marginal analysis
“How much” decisions require making trade-offs at the margin: comparing the costs
and benefits of doing a little more of an activity versus doing a little bit less
People usually respond to incentives, exploiting opportunities to make themselves
better off; incentives: an opportunity to make themselves better off
The principle that people will exploit opportunities to make themselves better off is
the basis of all predictions by economists about individual behavior
Economists tend to be skeptical of any attempt to change people’s behavior that
doesn’t change their incentives;
Interaction: How Economies Work:
To understand how a market economy behaves, we have to examine this interaction
in which individual choices affect each other
The key to a much better standard of living for everyone is trade, in which people
divide tasks among themselves and each person provides a good or service that other
people want in return for other goods and services
The reason we have an economy, not self-sufficient individuals, is that there are gains
from trade: by dividing tasks and trading; people get more from trade than they could
if they tried to be self-sufficient
Interaction of choices is a feature of most economic situations
Gains from trade arise from this division of tasks: specialization: when people engage
in a different task and specialize in the ones they are good at performing
The advantages of specialization and the gains from trade were the starting point of
The Wealth of Nations book by Adam Smith
The economy, as a whole, can produce more when each person specializes and trades
The benefits of specialization are why a person typically chooses only one career
As long as the individuals know they can find goods/services they want in the market,
they will forgo self-sufficiency and specialize
An economic situation is in equilibrium when no individual would be better off doing
something different: the opportunities to make themselves better have been exploited
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ECON 101 Full Course Notes
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Document Summary
All economic analysis is based on a set of principles that apply to many issues. Every economic issue involves individual choice- decisions by an individual about what to do and what not to do. Choices are necessary because resources are scarce; ex. A resource is anything that can be used to produce something else ex. Opportunity cost: what you must give up to get an item you want. The opportunity cost of an item-what you must give up in order to get it- true cost; all costs are opportunity costs because every choice means forgoing an alternative. Much economic analysis involves no direct monetary cost. A trade-off is a comparison of costs and benefits. Decisions about whether to do a bit more or a bit less of an activity are marginal decisions; the study of such decisions is known as marginal analysis.
