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ECON 101 Review Notes.docx

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Department
Economics
Course
ECON 101
Professor
Eva Lau
Semester
Fall

Description
Econ 101 Review Notes Chapter 1 Definitions Scarcity: the inability to satisfy all of our wants and needs Incentive: a reward that encourages an action or a penalty that discourages one Economics: the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices Microeconomics: the study of choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments Macroeconomics: the study of the performance of the national economy and the global economy Two Big Economic Questions 1. What, How, and For Whom to produce? o Goods and services are the objects people value and produce to satisfy human wants o What? What we produce changes over time It has moved from manufacturing to services o How? Goods and services are produced using the factors of production: Land natural resources Labour work time and effort by people (quality depends on human capital) Capital tools, instruments, machines, buildings Entrepreneurship the human resource that organizes land, labour, and capital o For Whom? It depends on the incomes that people earn Land earns rent Labour earns wages (70% of income) Capital earns interest Entrepreneurship earns profit 2. How can the Pursuit of Self-Interest Promote the Social Interest o Self-Interest A choice that is the best one available to you o Social Interest Self-interested choices promote the social interest if they lead to an outcome that is best for society as a whole an outcome that uses resources efficiently and distributes goods and services equitably among individuals Resources are used efficiently when: Produced at the lowest possible cost Produced in the quantities that give the greatest possible benefit o Self-Interest and the Social Interest Globalization The Information-Age Economy Global Warming Natural Resource Depletion Economic Instability The Economic Way of Thinking Choices and Tradeoffs o Tradeoff: giving up one thing to get more of another What, How, and For Whom Tradeoffs o What Tradeoffs how to spend income o How Tradeoffs how to produce o For Whom Tradeoffs distribution of buying power The Big Tradeoff: Equality vs. Efficiency Opportunity Cost: the highest valued alternative given up Choosing at the Margin o Comparing benefits and costs o Marginal Benefit: the benefit that arises from an increase in an activity o Marginal Cost: the cost of increasing an activity Economics as Social Science and Policy Tool o Economics as a Social Science Positive Statements about what is Economists test them against facts Normative Statements what ought to be They depend on values and cannot be tested Economic Models: a description of some aspect of the economic world that includes only the features needed Natural Experiments: a situation that arises in the ordinary course of economic life Statistical Investigation: looks for correlation between to variables Economic Experiment: puts people in a decision-making situation and varies the influence of factors to see how they respond o Economics as Policy Tool Personal Economic Policy Business Economic Policy Government Economic Policy Chapter 1 Appendix Time Series Graph: measures a variable over time, also reveals trends Cross-Section Graphs: shows values of an economic variable for different categories at a point Scatter Diagrams: one variable against another Positive Relationship (direct relationship): two variables that move up and down together Negative Relationship (inverse relationship): two variables that move in opposite directions Chapter 2 Production Possibilities and Opportunity Cost The production possibilities frontier is the boundary between those combinations of goods and services that can be produced and those that cannot It illustrates scarcity because not all points are attainable Production Efficiency is achieved is we produce at the lowest possible cost (all points on the PPF) Production inefficiency is due to unused or misallocated resources Opportunity Cost As a Ratio: The decrease in the quantity produced of one good divided by the increase in the quantity produced of another Opportunity cost increases as more of the x-variable are produced The PPF is bowed outward because resources are not all equally productive in all activities Using Resources Efficiently Allocative efficiency: when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit Marginal Cost: the opportunity cost of producing one more unit (the slope of the PPF) Preferences: a description of a persons likes and dislikes Marginal Benefit: the benefit received from consuming one more unit of it (the most that people are willing to pay for an additional unit) Illustrate preferences using the marginal benefit curve Allocative Efficiency: MC = MB Economic Growth Economic growth: expansion of production, increase our standard of living The Cost of Economic Growth: o Technological Change o Capital Accumulation Gains from Trade Comparative Advantage: an activity that a person can perform at a lower opportunity cost than anyone else Absolute Advantage: An activity in which the person is more productive than others People should specialize in which they have a comparative advantage and then trade Dynamic Comparative Advantage: a comparative advantage that has been acquired by learning- by-doing Economic Coordination Firms o An economic unit that hires factors of production and organizes those factors to produce and sell goods and services Markets o Any arrangement that enables buyers and sellers to get information and to do business with each other
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