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Chapter 1-3

Microeconomics (ECO102) Chapter 1-3.docx

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Bishop's University
ECO 102
Thierry Eyland

Chapter 1 1. Key Concepts a. Opportunity cost: i. The next best alternative forgone (given up) in order to obtain a certain good or service b. Production possibilities frontier (PPF) i. Shows the various combinations of output that the economy can possibly produce ii. Ex. A society that produces either shirts of potatoes; fewer shirts produced with more potatoes produced iii. GRAPH: 1. Inefficient points 2. Efficient points (shows choice and opportunity cost) 3. Infeasible points (shows scarcity) iv. Increasing OC 1. Implies that the PPF is not a straight line 2. PPF is a straight line when OC is constant 3. All combinations on PPF are efficient Chapter 2-33 1. Economics as a science a. Positive economics i. Claims that attempt to describe reality (can be proven right or wrong using evidence) b. Normative economics i. Claims that attempt to prescribe how the world should be (involves value judgment) c. Exogenous Variable: i. A variable that is determined outside the theory. Sometimes called an autonomous variable or independent variable d. Endogenous variable i. A variable that is explained within a theory. Sometimes called an induced variable or a dependent variable e. Correlation i. A mutual relationship or connection between two or more things ii. X and Y move together (positively or negatively) f. Causation i. The relationship between cause and effect ii. If X increases Y will also increase. X is predicted to cause a change in Y 2. Math review a. Slope = change in Y/change in X = rise/run 3. PPF vs. CPF a. PPF of each person is also his CPF (consumption possibilities frontier) b. A producer has a comparative advantage if the producer can produce the good at a lower opportunity cost given the same amount of (time) ressources c. Implication for trade: i. Each person should specialize in producing the good they have a comparative
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