EC 210 1st EditionExam # 1 Study Guide - Scarcity refers to the limited nature of the society’s resources, given society has unlimited wants and needs.- Economics is the study of how people allocate their limited resources to satisfy their nearly unlimited wants - Microeconomics is the study of individual units that make up the economy.- 5 foundations of microeconomics *Incentives- factors that motivate a person to act or exert effort. *Trade-offs- the cost of the decisions we make. *Opportunity cost – the highest-valued alternative that must be sacrificed in order to get something else. *Marginal thing – requires decision –makers to evaluate whether the benefit of one more unit of something is greater than its cost. *Principle that trade creates value- Marginal analysis – for example your decision on how much money you want to get by working more hrs to earn more instead of studying more to get better grades.- Marginal thinking requires decision makers to evaluate whether the benefit of one more unit is greater than the cost.- Linked to the example (will the value of getting more money be greater to you than getting a better grade?)- Trade is the voluntary exchange of goods and services between two or more people or parties. - Comparative advantage is a situation in which one party can produce at a lower opportunity costthan the competitor.- note that trade generates gain for everyone involved. CHAPTER 2: MODEL BUILDING AND GAINS FROM TRADE.- How do economist study the economy ?- Economics is a social science that uses scientific methods (economic models).- The scientific method in economics- we replicate the circumstance and duplicate the result.- There are two types of analysis Positive and normative analysis- Economics is confined to positive analysis.- A positive statement can be tested and validated it describes “what it”.- A normative stamen is an opinion that cannot be tested or validated; it describes “what ought to be”.- Certeris Paribus is a concept under which economist examine a change in one variable while holding everything else constant. ( all things being equal).- Types of factors -Endogenous vs exogenous factors.- Endogenous factors are factors that we know about and can control- Exogenous factors are factors beyond our control.- What is a production possibilities frontier? It is a model that illustrates the combination of the outputs that society can produce if all resources are being used efficiently.--- This is a sample of a production possibility frontier for a society that produces wings and pizzas.- The law of increasing related cost states that the opportunity cost of producing a good rises as a society produces more of it.- Production possibility frontier (ppf) and economic growth - Economic growth is the process that enables society to produce more output in the future.- A new development in technology causes the ppf to move from ppf1 to ppf2- Downward-sloping PPF illustrates opportunity costs of production. When we produce more wings, we have to give up some pizza. If we are on the PPF, we can’t JUST produce more wings since we are already using all our resources. If we want more wings, we must take awaysome resources currently devoted to pizza production.-- Inefficient points are attainable (we COULD produce at F), but undesirable in the sense that we would do better. F has us producing 40 pizzas and 70 wings. We could produce 40 pizzas and 270 wings. We’re not doing as well as we can.-- We say “unattainable (for now)” because point E may become attainable later on if we experience economic growth, which may increase resources or technology.- When there are more resources to produce both there is an increase in production of both so the ppf shifts outward and to the right- If the PPF were to expand outward, some previously unattainable good combinations would nowbe possible to produce.- The PPF could shift graphically in two ways. New resources or technology could be introduced that eitherAffect the production of one good, orAffect the production of both goods- Benefits of specializing and trade - Gains from trade.- Debra winger and mike pizzaDebra winger Mike pizza60 pizzas 24 pizzas120 wings 72 wings Debra ha the absolute advantage because she can produce more of bothAbsoluteAbsolute advantage is the ability of one producer to produce more than the another with the same amount of resources Specialization can reflect in the production of 2 addional pizzas and 14 additional wings- When debra produces on her own she can only produce 40 wings and 40 pizzas.- When mike produces on his own he can only produce 18 wings and 18 pizzas- But when debra specializes in producing pizza she produces 60- And when mike specializes in producing wings he produces 72- When they trade debra has 41 pizzas and 47 wings- Ansd mike has 19 pizzas and 25 wings - So they both gain from trade- In other to decide who to produce what we must consider the opportunity cost- The opportunity cost of Debra producing 2wings is ½ a pizza - And for mike 3wings cost him a 1/3 of a pizza therefore since the cost of producing pizza for mike is greater as he will lose 3 wings mike should specialize in the wings- Consumer goods are produced for present consumption - Capital goods help produce other valuable goods and services for the future - Investment is the process of using resources to create or buy new capital What are the fundamentals of a market? In a market economy resources are allocated among households and firms with little or no government interference.- Competitive market exists when there are so many buyers and sellers that each one has little impact on the market price and output.- Imperfect market is one which either the buyer or seller has an influence on the market price- Monopoly exists when a single company supplies the entire market for a particular good or service- Quantity demanded is the amount of goods or services the buyer is willing and able to produce at a particular price (current price)- The law of demand states that all things being equal quantity demand falls when price rises and rises when price falls.- Demand schedule is a table that shows the relationship between price of a good and quantity demanded - Demand curve is a graph that shows the relationship between price in the demand schedule and quantity demanded at those prices - Example of a demand scheduleThe supply curve