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Miami University Hamilton - CMR 111 - Study Guide - Midterm

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Miami University Hamilton - CMR 111 - Study Guide - Midterm

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background image Midterm Exam STUDY GUIDE ­ Chapters 1­7 Chapter 1: Five Foundations of Economics 5 Foundations: Incentives Factors that motivate someone to act a certain way Positive incentives ­ encourage action by offering rewards Negative incentives ­ Discourage actions by providing a 
consequence
Direct incentives ­ Results occur right after an action and are
easy to identify 
Indirect incentives ­ Occur as a result of the action combined
with other factors
Trade­Offs Choosing one thing means that you won’t have the time or 
resources for another thing
If you have a short amount of  free time, choosing to read a 
book means you won’t be able to watch TV.
Opportunity Cost The highest valued alternative that must be sacrificed to get 
something else
EXAMPLE: I want to go to a football game on friday most, but I could 
also go bowling. 
The least desirable choice is to stay home and do 
homework.
 If I go to the game, my opportunity cost is bowling. If I go 
bowling, my opportunity cost is the game.
Marginal Thinking Decision­makers evaluate whether the benefits of one choice 
outweigh the costs of another
When I clean my house, is the hassle of moving the 
refrigerator worth having the floor clean under it? Probably 
not, since it is really difficult to move and nobody sees under 
it anyway.
Trade Creates Value Both parties want to benefit from trade by getting something that is 
more valuable to them
Trade: voluntary exchange of goods/services between 2 or 
more parties
background image Barter: Providing a service or trading a good you already 
have in exchange for something you want
Markets bring buyers/sellers together to exchange goods/services Comparative advantage: One institution can produce at a lower 
opportunity cost than the competition can
Chapter 2: Model Building and Gains From Trade The scientific method is used in economics Researchers observe an interesting phenomenon Develop a hypothesis based on observations Construct a model to test hypothesis Design experiments to test the model Collect data and either verify or revise hypothesis Positive Statement: can be tested and verified, describes “what is” Normative Statement: an opinion that can’t be tested/verifies, describes “what 
ought to be”
Production Possibilities Frontier (PPF):
a model that illustrates the combination
of outputs a society can produce if all of
its resources are used efficiently
Must consider opportunity cost ­
choosing to put resources into
one thing means there will be
less of them for another
Law of increasing
opportunity cost:
opportunity cost of
producing a good rises as
society produces more of
it
Specialization ­ limiting work to a particular area Comparative Advantage: The ability of one producer to carry out 
production better than another
Absolute Advantage: the ability of one producer to make more than 
another with the same quantity of resources
Types of goods: Consumer goods: produced for present consumption
background image Capital goods: help produce other goods/services in the future Investment: using resources to create or buy new capital Chapter 3: The Market at Work Market economy: resources are allocated among households and firms with little 
government interference
The invisible hand: unobservable market forces that guide resources to their 
highest valued use
Phrase was coined by Adam Smith Prices are set in the market and allow for exchange of goods/services Competitive markets: Many buyers and sellers, so individual actions have little 
impact on the market as a whole
Imperfect markets: Either the buyer or seller influences market price Market power: firm’s ability to influence a good/service’s price by 
exercising control over the supply, demand, or both
Monopoly: A single company supplies the entire market for a good/service Market demand: sum of all individual quantities demanded by each buyer in the 
market at each price
Supply and demand: Law of supply: quantity supplied rises when price rises, and falls when 
price falls
Law of demand: quantity demanded falls when prices rise, and rises when
prices fall
Quantity demanded: amount of a good/service that buyers are 
willing and able to purchase at the current price
Law of supply and demand: market price of any good will adjust to bring 
quantity supplied and quantity demanded into balance
Types of goods: Classification of goods may vary based on different people’s perception 
and income level
Normal good: Tends to be purchased more as income rises, but other 
factors remain constant
Example: Whole wheat pasta noodles, Organic fruit  Inferior good: Purchased out of necessity rather than choice Example: Generic brand cereal, used vehicles as opposed to new 
vehicles
Compliment: 2 goods that are used together

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School: Miami University Hamilton
Department: OTHER
Course: Economics for Commerce
Professor: Monticha Sompolvorachai
Term: Spring 2018
Tags:
Name: 3/31 Exam Study Guide
Description: Covers Chapters 1-7
Uploaded: 03/20/2018
7 Pages 61 Views 48 Unlocks
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