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ECON101 Chapter Notes -Overproduction, Takers, Fixed Cost

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Eva Lau

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Econ 101 Review Notes
Chapter 1
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
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 tools, instruments, machines, buildings
Entrepreneurship the human resource that organizes land, labour, and
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

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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
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
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

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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
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 person’s likes and dislikes
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