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Econ 102, Exam I study guide

by: Ahmed Abuhjar

Econ 102, Exam I study guide ECON 102

Marketplace > Iowa State University > Macro Economics > ECON 102 > Econ 102 Exam I study guide
Ahmed Abuhjar
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About this Document

These documents covers simple, brief, and important topics from chapter 1 & 2. It would help a little to narrow what to study over the Exam I preparation.
Amani Elobeid
Study Guide
Econ, ECON102, Macroeconomics
50 ?




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This 6 page Study Guide was uploaded by Ahmed Abuhjar on Wednesday September 14, 2016. The Study Guide belongs to ECON 102 at Iowa State University taught by Amani Elobeid in Fall 2016. Since its upload, it has received 16 views. For similar materials see macroeconomics in Macro Economics at Iowa State University.

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Date Created: 09/14/16
ECON 102 Exam I Study Guide Chapter 1: What is the difference between the microeconomics and the macroeconomics? Definitions: Microeconomics: is the study of the choices that individuals and businesses make. Example of that is that individual people buying certain goods. Macroeconomics: is the study of the performance of the national and global economies. This can include the study of the unemployment rate in a certain country. Q- What is the economic definition of scarcity? Scarcity: is our inability to get everything we want.  Because we face scarcity, we must make choices.  The choices we make depend on the incentives we face.  An incentive is a reward that encourages and action or penalty that discourages an action. Economics is composed of these three key “main” words (Scarcity, Choices, & Incentives) : Economics: is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Two big questions summarize the scope of economics:  How do choices end up determining what, how, and for whom goods and services get produced?  When do choices made in the pursuit of self-interest also promote the social interest?  What, How, and For Whom? Goods and services are the objects that people value and produce to satisfy human wants. - What : What we produce varies across countries and changes over time. - How? Using the factors of production. o Factors of production are grouped into four categories:  Land (gifts of nature)  Labor (Work time, Effort, …)  Capital (Tools, instruments, materials, human capitals such as the skills of the worker)  Entrepreneurship (human resource) - For Whom? o Who gets the goods and services depends on the incomes that people earn.  Land earns rent.  Labor earns wages.  Capital earns interest.  Entrepreneurship earns profit. Do Choices Made in the Pursuit of Self-Interest also Promote the Social Interest? Self-Interest Choices based on self-interest—choices that you think are best for you. Social Interest Choices best for society.  Efficiency : the point where we cannot make someone better off without making someone else worse off.  Equity : = fairness Six key ideas define the economic way of thinking:  A choice is a tradeoff.  People make rational choices by comparing benefits and costs.  Benefit is what you gain from something.  Cost is what you must give up to get something.  Most choices are “how-much” choices made at the margin.  Choices respond to incentives.  Making a Rational Choice A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice How do people choose rationally? The answers turn on benefits and costs. Benefit: What you Gain (determined by references.. Cannot be derived from certain statistics). Cost: What you Must Give Up The opportunity cost of something is the highest-valued alternative that must be given up to get it. How Much? Choosing at the Margin: To make a choice at the margin, you evaluate the consequences of making incremental changes in the use of your time. marginal benefit (MB) is the benefit from pursuing an incremental increase in an activity. marginal cost (MC) is the opportunity cost of pursuing an incremental increase in an activity. If MB >> MC, then you do the activity  Choices Respond to Incentives A change in marginal cost or a change in marginal benefit changes the incentives that we face and leads us to change our choice. Review : Appendix I / Graphs in Economics Chapter 2: THE ECONOMIC PROBLEM Production Possibilities Frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot. - Any point on the frontier inside the PPF are attainable. - Points outside the PPF are unattainable. Production Efficiency - We achieve production efficiency if we cannot produce more of one good without producing less of some other good. - Points on the frontier are efficient. - Any point inside the frontier is inefficient. Tradeoff Along the PPF - Every choice along the PPF involves a tradeoff, which means we must give up some of good A to get more of good B or vise-versa. - The opportunity cost of producing one good is expressed in terms of how much we are giving up from another good in order to produce that first good. - Opportunity Cost Is a Ratio o If the OC of producing good A is (2 of good B), then the OC of producing good B is the inverse (1/2 of good A). o The outward bow of the PPF means that as the quantity produced of each good increases, so does its opportunity cost. Preferences and Marginal Benefit Preferences are a description of a person’s likes and dislikes. Marginal benefit is the amount that a person is willing to pay for an additional unit of a good or service - The marginal benefit curve shows the relationship between the marginal benefit of a good and the quantity of that good consumed. Allocative Efficiency - When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved allocative efficiency. - We are producing at the point on the PPF that we prefer above all other points. - The point of allocative efficiency is the point on the PPF at which marginal benefit equals marginal cost. Economic Growth: Two key factors influence economic growth:  Technological change  Capital accumulation Technological change is the development of new goods and of better ways of producing goods and services. Capital accumulation is the growth of capital resources, which includes human capital. “The opportunity cost of economic growth is less current consumption.” To use resources in research and development and to produce new capital, we must decrease our production of consumption goods and services. Gains from Trade: Comparative Advantage and Absolute Advantage - A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else. - A person has an absolute advantage if that person is more productive than others. Economic Coordination: To reap the gains from trade, the choices of individuals must be coordinated. To make coordination work, four complimentary social institutions have evolved over the centuries:  Firms : economic unit that hires factors of production and organizes those factors to produce and sell goods and services.  Markets: market is any arrangement that enables buyers and sellers to get information and do business with each other  Property rights: are the social arrangements that govern ownership, use, and disposal of resources, goods or services.  Money is any commodity or token that is generally acceptable as a means of payment.


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