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econ 1030

econ 1030

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ECON 1030 - Principles of Microeconomics (Dr.Mcdonald) Exam 1 Study Guide


Marginal thinking in economics.



Highlight = Important People Highlight = Key Term Highlight = Important Concept

▪ Opportunity Cost: The value of the next best alternative. "What are you willing to give  up to get what you want?"  

Example: You are choosing how to spend your Friday night. You could either go to a  movie, or study for your exam on Monday to get a better grade. If you choose to study,  the opportunity cost of studying is the enjoyment you would have gotten out of seeing  a movie.

▪ Broken Window Fallacy:  

This fallacy was coined by the great French economist Fredric Bastiat. Bastiat used the  parable of a broken window to show how destruction does not benefit the economy.  The parable consists of a boy breaking a pane of glass. The onlookers consider the  situation an economic service because the man will have to pay to get his window fixed,  which will stimulate the economy. Bastiat exposes this fallacy by pointing out that, while  the money may benefit the window repair man, at the same time it robs other industries  and reduces the amount of money being spent on other goods and services. This fallacy is  often used to discredit the idea that going to war benefits a country's economy.


Rationality- rational thinking in economics.



▪ Marginal Thinking in Economics - Key Terms:

1. Marginal Cost: The cost added by producing one additional unit of a product  or service.

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2. Marginal Benefit: The additional benefit arising from a unit increase in a  product or service.

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∆ = Change in Q = Amount Consumed/Produced

3. Total Cost: All the costs incurred in producing a good or performing a service Total Cost = Variable Costs + Fixed Costs

4. Total Gain: The total gain of a particular party in a trade.

Total Gain = Cost of Produced Good – Amount Sold For

Example - Marginal Benefit of Sleep:

Hours Slept

Total Benefit

Marginal benefitWe also discuss several other topics like eulerpfad

1

50

 N/A

2

90


What is law of supply?



90 − 50

2 − 1= 40

3

110

110 − 90

3 − 2= 20

4

120

 120−110 

4−3= 10

The marginal benefit of sleep goes down over time, while the total benefit slowly climbs. ---------------------------------------------------------------------------------------------------------------------

Rationality – Rational Thinking in Economics:

o 1.) People are goal seeking. 

▪ A businesses ultimate goal is to maximize profits

▪ Ordinary people want to maximize utility.

2.) People respond to incentive. 

▪ A motive for everything

▪ Wanting to minimize injury is an incentive to wear a seat belt.

3.) People think at the margin. 

▪ “Think about the next step forward.”

▪ “What does the next action mean for me?”

4.) Rational people ignore a sunk cost 

▪ A Sunk Cost is an expenditure that is unrecoverable.

• The Law of Demand: a microeconomic law that states; as the price of a good or service  increases, consumer demand for that good or service will decrease, and visa versa.

• Substitution Effect: The economic understanding that as prices of a good increase (or  consumer income decreases) consumers will replace expensive items with less costly  alternatives. For example, generic breakfast cereals.

• Income Effect: represents how the change in an individual’s or economy’s income  impacts the quantity demanded of a good or service. For example, if an individual’s  income increases, he/she will be more willing to spend. Thus increasing consumption. If you want to learn more check out unlv biology

• Demand Curve: a graph showing how change in the demand for a good or service varies  with its change in price and other factors. If you want to learn more check out xoxozoyya

How to Read and Construct a Demand Curve

The line represents the demand in  

relation to the price (P) and the quantity  

produced (Q). Each point on the line  

shows this direct correlation.  

As the price of a good at each point  

)

increases, demand goes down. As a result,  

P

(

 

E

C

the quantity produced falls as well.

I

R

P

Example Demand Curve

Q1 Q2 Q3 Q4 QUANTITY AVAILIBLE

Demand

--------------------------------------------------------------------------------------------------------------------- • Factors that Effect Demand:

1.) Income

2.) Population

3.) Preferences

4.) Price of Related Goods

5.) Expectations about the future.

How Income Effects Demand:

As the overall income of the population  

increases, people's willingness to pay for a good or  )

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service increases. Therefore, increasing quantity  

P

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y

demanded.  If you want to learn more check out hist 101 unlv

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a

p

 

o

400

t

 

g

n

200

i

l

l

i

Demand 1 directly correlates with an initial income.  0

w

 

t

Demand 2 represents that same economy if the  

n

u

overall income of the population is increased by 20%

o

m

A

How Population Effects Demand:  

Relation Between Income  and Demand

Q3 Q2 Q

Quantity Produced (Q)

Demand 1 Demand 2

The more people in a population will increase the demand of goods and services.    

How Prices of Related Goods Effect Demand:

Complements: goods that are frequently bought together (ex. Peanut butter and jelly.)

Substitutes: goods in which, as a result in changed economic conditions, may replace  another related good. (ex. Generic breakfast cereal.)

With complementary products, the price or availability of one will directly affect the  demand of the other. For example, if the price of peanut butter goes up, one can expect the  demand for jam to go down, and visa-versa.  If you want to learn more check out revenues minus expenses equals net income
If you want to learn more check out mth 132 msu

With substitutes, if the price of the main good goes up, the demand for a substitute will  rise.

---------------------------------------------------------------------------------------------------------------------

"Law of Supply": in general, there is a positive relationship between the price of a good or  service and the quantity supplied.

Why is supply, in general, upward sloping?:

1.) Inputs (materials used to produce a good) become increasingly expensive.

2.) Diminishing Marginal Productivity: As we use more of an input, it becomes less   effective, all else equal.

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∆ ���������� ∆ = Change in

 Q = Amount consumed/Produced

--------------------------------------------------------------------------------------------------------------------- • Market Equilibrium

Price Floor: the minimum price that goods are legally allowed to be sold. 2 Concerns of Minimum Wage:

1.) Will the minimum wage increase unemployment?

2.) Is there a more efficient way to decrease poverty?

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