Ecn 201 1st Edition Exam # 1 Study GuideMaterial:-Krugman chapters 1,2,3,4-Lectures 1-7Basic Fundamental Knowledge:1. First Principlesa. Know the meaning of 12 principlesPrinciples That Underlie the Economics of Individual Choice:1. Resources are scarce.2. The real cost of something is what you must give up to get it.3. “How much?” is a decision at the margin.4. People usually exploit opportunities to make themselves better ofPrinciples That Underlie the Interaction of Individual Choices:1. There are gains from trade.2. Markets move toward equilibrium.3. Resources should be used as efficiently as possible to achieve society’s goals.4. Markets usually lead to efficiency.5. When markets don’t achieve efficiency, government intervention can improve society’s welfare.Principles That Underlie Economy-Wide Interactions:1. One person’s spending is another person’s income.2. Overall spending sometimes gets out of line with the economy’s productive capacity.3. Government policies can change spending.b. Able to judge that which principle it follows when facing practical examplesc. Understand the opportunity costOpportunity cost: what you must give up in order to get something.Example: It is the last term before you graduate, and your class schedule allows you to take only one elective. There are two, however, that you would really like to take: History of Jazz and Beginning Tennis. Suppose you decide to take the History of Jazz course. What’s the cost of that decision? The opportunity cost of taking the History of Jazz class is the enjoyment you would have derived from theBeginning Tennis class.d. Understand the marginal analysisThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Marginal decisions: Decisions about what to do with your next hour, what to do with your next dollar, and so on. They involve making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. Thestudy of such decisions is known as marginal analysis.Example: Spending another hour studying chemistry or spending it studying economics2. Economics Modelsa. Able to explain information from the graphs-An important assumption when building economic models is the other things equal assumption, which means that all other relevant factors remain unchanged.-b. Production possibility frontier (PPF) model-The production possibility frontier illustrates the trade-offs facing an economy that produces only two goods. It shows t-he maximum quantity of one good that can be produced for any given quantity produced of the other.i. Understand efficiency and attainability-The production possibility frontier is a good way to illustrate efficiency. An economy is efficient if there are no missed opportunities—there is no way to make some people better off without making other people worse off.-A price and quantity combination is attainable if it is either on or under the PPF curve on a graph. If it is above, or to the right of the curve, it is not attainable.ii. Be able to calculate the opportunity cost along the PPF-Opportunity cost: the true cost of any good is not just the amount of money it costs to buy, but everything else in addition to money that must be given up in order to get that good.Example: Tom decides to go from point A to point B, he will produce 8 more fish but 6 fewer coconuts. So the opportunity cost of those 8 fish is the 6 coconuts not gathered.c. Economic growth-Economic growth: the growing ability of the economy to produce goods and services.-Second definition of economic growth: an expansion of the economy’s production possibilities – the economy can produce more of everything. (The PPF shifts outwards)-Two sources of economic growth:1. An increase in the economy’s factors of production, the resources used to produce goods and services.2. Technology: the technical means for the production of goods and services.d. Understand what are factors of production-Factor of production refers to a resource that is not used up in production.Example: workers use sewing machines to convert cloth into shirts; the workers and the sewing machines are factors of production, but the cloth is not.e. Understand the theory of “Gain from trade”-Gains from trade: the mutual gains that individuals can achieve by specializing in doing different things and trading with one another. A model of gains from trade shows trade based on comparative advantage.f. Be able to calculate the opportunity cost, distinguish absolute advantage, comparative advantage, and what to trade.-An individual has a comparative advantage in producing something if the opportunity cost of that production is lower for that individual than for other people.-An individual has an absolute advantage in an activity if he or she can do it better than other people. Having an absolute advantage is not the same thing as having a comparative advantage.3. Demand and Supply / Market equilibriuma. Know what is the competitive marketA competitive market is a market in which there are many buyers and sellers of the samegood or service. More precisely, the key feature of a competitive market is that no individual’s actions have a noticeable effect on the price at which the good or service is sold.i. What are the assumptions and what do these assumptions mean1. A sufficient number of buyers and sellers of the good exist.2. The good is homogeneous.3. Information is perfect. (meaning that people understand what the market is and what the products are and their worth)4. No barriers to entry or exit are present.b. Understand the demand modeli. Quantity demanded, demand schedule, demand, and demandcurve-Quantity demanded: the actual quantity that buyers are willing (and able) to purchase at a particular price-A demand schedule is a table showing how much of a good or service consumers will want to buy at different prices.-Demand represents the behavior of buyers.-A demand curve is a graphical representation of the demand schedule, another way of showing the relationship between the quantity demanded and price. The vertical axis shows the price of a product and the horizontal axis shows the quantity of the product. Each point on the graph corresponds to one of the entries in the table. The curve that connects these points is a demand curve.ii. Moving along the curve or shifting the