Chapter 1 (Lectures #1- #2):Individual Choice- Individual choice is the decision of what to do and also involves a decision of what not to do. Choices are necessary because resources are scarce.Basic Principles Behind Individual ChoiceResources and ScarcityOpportunity CostMarginal CostsPeople take advantage of opportunities to make themselves better offInteraction: How Economies WorkEconomy-wide InteractionsChapter 2 (Lectures #2- #3):Chapter 3 (Lectures #4- #5):-A competitive market- many buyers and sellers; same good or service being demanded and supplied.DemandCauses of Shifts of DemandSupplyCauses of Shifts of SupplyChapter 4 (Lectures #5- #6):Exam 1 Study Guide Chapter 1 (Lectures #1- #2): Individual Choice- Individual choice is the decision of what to do and also involves a decision of what not to do. Choices are necessary because resources are scarce.Basic Principles Behind Individual Choice- Resources are scarce.- Opportunity Cost- the real cost of something is what you must give up to get it.- Marginal analysis- People take advantage of opportunities to make themselves better off.Resources and Scarcity- Resources: anything that can be used to produce something else- Scarcity: something that is in short supply; resources are scarce when they are not sufficient to satisfy the wants and needs of the society.Opportunity Cost- The real cost of something is its opportunity cost.- What you must give up to get something - For example, the opportunity cost of studying for economics is the numbers of hours of sleep you give up.Marginal Costs- “How Much” is the decision at margin.- Decisions about whether to do a bit more or less of an activity are called marginal decisions.- An individual makes a trade-off when comparing the costs with the benefits of doing something. Comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less is making trade-offs at the margin.- Marginal analysis: the study of such decisions. ECON 2106 1st EditionPeople take advantage of opportunities to make themselves better off- Incentive: anything that offers rewards to people who change their behavior.- People respond to these incentives, exploiting opportunities to make themselves off.Interaction: How Economies WorkInteraction of choices is essential in economic situations.- There are gains from trade:- People can get more of what they want through trade than they could if they tried to be self-sufficient.- Increase in output is due to specialization. Each person specializes in the task he/she is good at performing.- Markets Move Toward Equilibrium:- An economic situation is in equilibrium when no individual would be better off doing something different.- Any time there is a change, the economy will move to a new equilibrium.Resources should be used as efficiently as possible to achieve society’s goals:- An economy is efficient if it takes all opportunities to make some people better off without making other people worse off.- Equity means that everyone gets his/her fair share. MMarkets usually lead to efficiency: - People normally take opportunities for mutual gain.When markets don’t achieve efficiency, government intervention can improve society’s welfare:- why do markets fail?- Individual actions have side effects not taken into account by the market (externalities)Economy-wide Interactions- One person’s spending is another person’s income- Overall spending sometimes gets out of line with economy’s productive capacity- Government policies can change spendingChapter 2 (Lectures #2- #3): Models: A simplified representation of a real situation that is used to better understand real-life situations.- “other things equal” assumption means that all other relevant factors remain unchanged.- Production Possibility Frontier illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given production of the other.- Comparative vs. Absolute Advantage: An individual has a comparative advantage in producing a good orservice if the opportunity cost of producing the good is lower for that individual than for other people. An individual has an absolute advantage in an activity if he/she can do it better than other people. - Comparative advantage and international trade- Positive economics: is the branch of economic analysis that describes the way the economy actually works- Normative economics: makes prescriptions about the way the economy should work.Chapter 3 (Lectures #4- #5): -A competitive market- many buyers and sellers; same good or service being demanded and supplied.- Supply and demand model is a model of how a competitive market works.Demand- Demand schedule: shows how much of a good or service consumers will want to buy at different prices.- Law of Demand: As price increases, quantity demanded decreases and vice versa.- Movement Along the Demand Curve: a change in the quantity demanded of a good that is the result of a change in the good’s price.- Shifts of the Demand Curve: An “increase in demand” means a rightward shift of the demand curve. At any given price, consumers demand a larger quantity than before.Causes of Shifts of Demand- Changes in the prices of related goods: substitutes and complements- changes in income- changes in tastes- changes in expectationsSupply-Supply schedule: shows how much of a good or service would be supplied at different prices.- movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price.- Law of supply: As price increases, quantity supplied increasesCauses of Shifts of Supply-changes in input prices-changes in prices of related goods and services-changes in technology-changes in expectations-changes in number of producers Supply, Demand and Equilibrium- Equilibrium in a market exists when quantity demanded of a good equals to the quantity supplied of that good.Chapter 4 (Lectures #5- #6): -Individual consumer surplus: is the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyer’s willingness to pay and the price paid-Total consumer surplus: is the sum of the individual consumer surpluses of all buyers of a good-A fall in the price of a good increases consumer surplus through two channels. 1.) A gain to consumers who would have bought at the original