Create
Learn
Share

Econ1

rename
Updated 2007-02-13 20:24

Econ1

This is for Prof. Candido's Econ1 class. I'm using it as (initially) a midterm study guide and will probably amp it up to a final study guide by the time this quarter is over.

Ch 1: Thinking Like An Economist

termdefinition
EconomicsThe study of how people make decisions given a scarcity of goods
The Scarcity Principle (no-free-lunch)Needs and wants are limitless, but resources are limited; therefore, having more of one item will cause us to have less of another
Cost-Benefit PrincipleAn action should be taken if and only if the extra benefits of taking the action are < or = the extra costs
rational personSomeone with well-defined goals who tries to fulfill those goals as best as they can.
economic surplusbenefit of taking an action - cost of action
opportunity costvalue of the next-best alternative that must be forgone in order to undertake the activity ("the doors that you close in order to open one")
Decision Pitfall (1/4)Measuring costs and benefits as proportions as opposed to absolute $ amounts (i.e. saving $5 on $10 item vs. saving $5 on $500 item)
Decision Pitfall (2/4)Ignoring opportunity costs that are often implicit
sunk costsA cost that is beyond recovery at the time a decision is made
Decision Pitfall (3/4)Failure to ignore sunk costs
Marginal CostThe increase in total cost that results from carrying out +1 unit of an activity
Marginal BenefitThe increase in total benefit that results from carrying out +1 unit of an activity
Decision Pitfall (4/4)Failure to understand the average-marginal distinction
Average Costcost of undertaking N units / N
Average Benefitbenefit of undertaking N units / N
The "Not-All-Costs-and-Benefits-Matter-Equally" PrincipleSome costs and benefits (e.g. opp. costs, marginal costs/benefits) matter in making decisions, while others (e.g. sunk costs, average costs/benefits) don't
microeconomicsthe study of individual choices under scarcity and its implications for the behavior of prices and quantities in individual markets
macroeconomicsthe study of the performance of national economies and the policies that govt's use to try to improve that performance
memorize

Ch.2: Comparative Advantage: The Basis for Exchange

termdefinition
absolute advantagetaking fewer hours to perform a task than another person
comparative advantagewhen one's opp. cost of performing a task is < that of another person's
Principle of Comparative AdvantageEveryone does best when each person (or country) concentrates on the activities for which his or her opp. cost is lowest
Production Possibilities CurveA graph that describes the max amt of 1 good that can be produced for every possible level production of the other good
attainable point (PPC)any combo of goods that can be produced using currently available resources
unattainable point (PPC)any combo of good that cannot be produced using currently available resources
inefficient point (PPC)any combo of goods for which currently available resources enable an increase in the production of one good w/o a reduction in the production of the other (e.g. a point that is below the PPC)
efficient point (PPC)any combo of goods for which currently available resources do not allow an increase in the production of one good w/o a reduction in the production of the other
Principle of Increasing Opportunity Cost ("low hanging fruit")In expanding a good's production, first use resources w/ a lower opp. cost
memorize

 

Note: Greater differences in individual opp. costs -> more bow-shaped PPC -> great potential gains from specialization

Ch. 3 Supply And Demand: An Intro

termdefinition
marketall buyers and sellers of a good
demand curvea schedule or graph that shows the quantity of a good that buyers wish to buy at each price (always downward sloping)
substitution effectchange in quantity demanded of a good that results because buyers switch to subsitutes when the price of a good changes
income effectchange in quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power
buyer's reservation pricethe largest $ amt that a buyer would be willing to pay for a good (e.g. EBay's "maximum bid")
supply curvea curve or schedule showing the quantity of a good that sellers wish to sell at each price
seller's reservation pricethe smallest $ amt that a seller would be willing to sell an add'l unit, generally equal to marginal cost
equilibriuma system that has no tendency to change
equilibrium price + quantityvalues where quantity supplied = quantity demanded
market equilibriumwhen all buyers & sellers are satisfied w/ their respective quantities at the market price
excess supplythe amt by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price
excess demandthe amt by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price
price ceilinga max allowable price, specified by law
change in the quantity demandeda movement along the demand curve that occurs in response to a change in price
change in demanda shift of the entire demand curve
change in supplya shift of the entire supply curve
change in the quantity supplieda movement along the supply curve that occurs in response to a change in price
complementsa pair of goods where an increase in the price of one causes a leftward shift in the demand curve of the other good
substitutesa pair of goods where an increase in the price of one causes a rightward shift in the demand curve of the other good
normal goodone whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease (e.g. conveniently located apartments)
inferior goodone whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease (e.g. ground beef)
buyer's surplus
seller's surplus
total surplus
cash on the table
socially optimal quantity
efficiency
memorize