ECON 110 Exam # 1 Study Guide Lectures: 1 - 5Lecture 1 (August 21)The big idea of this lecture was the Ten Basic Principles of Economics.I. Tradeoffs: examples he gave were guns vs. butter or leisure time vs. time at work. This concept comes from the fact that resources are limited, and hence we must choose how to spend them.II. Opportunity Costs: What you give up to get what you desire. Examples are going to college vs. going to work or saving money for something in the future vs. spending it now. The opportunity cost of going to college is not the money spent on college, but rather the money that you could have made by working during that time.III. Comparing and contrasting benefits to costs: Specifically looking in the margins, or excess, you need to determine if the marginal benefits outweigh the marginal costs.IV. People respond to incentives: Specifically, people respond when the benefits outweigh the costs.Part 2 of the Ten Basic Principles all have to do with how people Interact.V. Trade can help everyone specifically because it encourages competition, and allows for specialization. You will also see in the comparative advantage section that it can even benefit a country who has absolute advantage in many products, meaning they can produce the most with the least resources.VI. Markets can be used to organize economic activity: In microecononmics, the market that we study is the one that occurs between households and firms, the interaction between which is referred to as “the invisible hand.” VII. Governments can improve market outcomes: When the market fails the government steps in to improve efficiency or equality. The government can also pass laws to regulate the invisible hand.VIII. A country’s quality of living is dependent on its ability to produce goods and services. The more goods or services it can produce, the more products it can sell, the more likely it is to have absolute advantage in terms of that product, and the more revenue it brings in. IX. Inflation occurs when the government prints too much money.X. Society plays a balance game between inflation and unemployment. Also termed equality and efficiency in economics, this is the constant battle.Other Big Ideas of EconomicsI. Scarcity: when society has less to offer than people are demanding.II. Choices: economics is all about the choices people make, studying why they make them, and attempting to influence them to make a choice that is beneficial to the economy.III. Forces that affect the economy in the grand scheme of things (but this is known as macroeconomics)Lecture 2 (August 26) Terms you should know: scarcity, tradeoffs, decision, opportunity cost, incentives, and choice. The economic approach of study can be compared to the scientific method (hypothesis, experimentation, analysis, and lastly either the hypothesis becomes a theory, or one must create a new hypothesis.) After observing patterns and developing an economic theory, we build economics models which we test to strengthen our theory.Economic models are the graphs, charts, and diagrams with which economists organize and demonstrate economic information. Examples include Circular Flow charts and Production Possibilities Frontiers. Lecture 3 (August 28)Circular flow diagram: details the economic relationship between households and firms. As you study the model, you will notice several elements to it. The different actors in this model are the firms, the households, and the markets. The firms are entities that utilize factors of production in order to turn out goods and services; they buy resources, hire labor, and convert resources into products for the households. The households consume the goods and services, and own and sell the factors of production such as labor and land. The markets are the means of exchange between the firms and the households. Factors of production in this model are resources. NOTE: Capital is any resource that is not human input, such as equipment and supplies, and is technically non-financial.Production Possibilities Frontier (PPF) is a graph that shows the combinations of outputs that are possible, given available factors of production and production technology. PPFs help to show the most efficient production choices by providing a visible representation of all possible tradeoffs. The line on the graph runs between the two maximum production possibilities on the axes, and is called the frontier line. The frontier line can change with changes in production factors.Positive and normative statements: While positive statements attempt to describe the world objectively (descriptive analysis), normative statements state how the world ought to be (prescriptive analysis.) Another way of looking at it is viewing it as the difference between studying economic phenomena and giving advice. It is important to understand the difference between the two. Lecture 4 (September 2)Absolute advantage: The ability to produce a good using fewer inputs than another producer.Example: In example one, you as a lawyer can produce a 50 page paper in an hour, whereas your secretary can only produce 25 pages in an hour. You have absolute advantage in terms of paper production because you use less time to produce more.Comparative advantage: The ability to produce a good at a lower opportunity cost than anotherproducer.Example: In example 3, Japan can produce a computer at the opportunity cost of 5 tons of wheat, while the opportunity cost for the U.S. to produce a computer is 10 tons of wheat. Therefore, Japan has comparative advantage in terms of production of computers.Example Problem: A lawyer charges $200 an hour; their secretary is paid $25 an hour. The lawyer can type 50 pages an hour, and the secretary can type 25 pages and hour. - What's the opportunity cost when you prepare a 50 page document? o This takes you one hour, in which you could have earned $200 by practicing law, so the opportunity cost is $200.- What's they opportunity cost when your secretary prepares the same 50 page document?o This takes the person two hours, but we're not concerned with all the other things they could be doing, because you can be earning $400 during that time, thus gaining $350.Comparative advantage at work: nowadays, we see a lot of specialization, rather than a variety of activities at work. This produces a lower opportunity cost in general. Economies and countries also specialize to some extent, i.e. America does not produce coffee because