Intro to Microeconomics Study Guide

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Economics is the study of allocation of scarce resources

1) Chapter One: The Principles of Microeconomics
a. Four resources: Land, Labor, Capital (machinery), Entrepreneurship (human capital) b. Principle #1: People face trade-offs, government also faces them, the main one the gov. faces is efficiency vs. equity i. Efficiency is when everyone who makes the most, keeps the most money ii. Equity would be if everyone was taxed the same

c. Principle #2: The cost of something is what you give up iii. Opportunity cost = the measurement of trade-off you give up something you can have later, to get something now d. Principle #3: Rational people think at the margin

iv. They do what’s best for them and maximize benefits v. Think at the margin = thinking about the NEXT one vi. Margin=small incremental changes
e. Principle #4: People respond to incentives
vii. Prices are major incentives
viii. Taxes/tax credit
f. Principle #5: Trade can make everyone better off
ix. Everybody can specialize
x. More variety of goods
xi. Doesn’t always make everyone better off ex: Jamaica, NAFTA xii. One partner can be strong and over power others g. Principle #6: Markets are a good way to organize economic activity xiii. People are guided by self-interest

xiv. Markets are where consumers and suppliers come together and trade-off occurs h. Principle #7: The government can improve market outcomes xv. Main act of government – enforce property rights xvi. Government can step in if there’s market failureexternalities occur (taxes can be enforced for cigarettes), people who aren’t in the market are affected xvii. Government can step in when there’s market power xviii. Monopoly/oligopoly-government might step in 2) Chapter 2: What does it mean to think like an economist? i. Objectively

j. Scientific method
xix. Observe, hypothesis, identify variables, collect data, test hypothesis, draw a conclusion k. Difficult to conduct a controlled experiment in economics l. Circular Flow Diagram = money and goods and services flow from input marketoutput market xx. Flow of Money: Market for factors of production (input market) households get income spending on markets of goods and services (output market) which generates revenue for firmswhich pay wages and rent for factors of production xxi. Flow of goods and services: Market for factors of production (input market) buys factors (land, labor, capital and entrepreneurship)firms which sell goods and servicesto market of gas and serviceswhich buy goods and services from households, which sell factors to market for factors of production xxii. This marketing is missing government, trade, savings, black market activities and charity work/non-profits m. Production Possibilities Frontier: how much a country can produce xxiii. Assumptions: one country, two goods, resource = labor xxiv. Bowed out PPF due to different resources (L)

xxv. Opportunity cost increases with bowed out PPF because it takes more and more to make one more of the good xxvi. Any points along the PPF are efficient, outside the curve are not feasible and inside the curve is inefficient xxvii. Efficiency means we maximize our resources

xxviii. To get more of the good, you have to give up some of the other good xxix. More resources for both goods increase: entire curve shifts out xxx. More resources for just one good increase: curve shifts on one side only xxxi. If the PPF is straight, it’s because there are multiple resources for both goods xxxii. Just stating a fact = positive statement and normative statement = subjective 3) Chapter 3: Absolute and...
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