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KSU / Economics / ECON 120 / Why is marginal thinking important?

Why is marginal thinking important?

Why is marginal thinking important?


School: Kansas State University
Department: Economics
Course: Principles of Microeconomics
Professor: Elif dilden
Term: Spring 2019
Cost: 50
Name: ECON 120 Midterm 1 Study Guide
Description: This covers some topics I predict will be on our exam!
Uploaded: 02/11/2019
4 Pages 44 Views 2 Unlocks

Midterm 1: Study Guide


Important Concepts

Why is marginal thinking important?

What is Economics?

● The study of how we allocate our limited resources to fulfill out unlimited wants ● Scarcity: the idea that the resources we have are all limited

Five Key Concepts

1. Life is About Trade-Offs 

● Trade offs: all of the options that have to be decided between when making a decision ● Ex. Go to a concert, go see a movie with friends, study for a test, go to sleep early a. Different cultures value different things that affect what trade-offs are compromised ● Cost-Benefit Analysis: determining a decision based on the comparison of the costs and benefits a. Cost of going to college: $$, 4-5 years

How can trade create value?

We also discuss several other topics like What is the free fall formula?

b. Benefit of going to college: degree, education, stronger skillset

i. C(x) cost of doing something

ii. B(x) benefit of doing something

iii. If B(x)>C(x), then decision “x” is deemed beneficial

2. Marginal Thinking 

● Measuring the additional benefits vs. the additional cost of “one more” of something ● How do you decide between doing more or doing less of an activity?

○ One more slice of pizza

○ More studying vs. more sleeping

○ Should I take another course

● Diminishing marginal utility: the principle that the additional utility gained from consuming successive units of a good or service tends to be smaller than the utility gained from the previous unit

What are the roles of economy?

○ If you were to sit down and eat 10 Hershey’s Kisses, towards the second half each one would produce less pleasure than the first half did We also discuss several other topics like What mass of o2 will react with 5.00 g of h2?

3. Opportunity Cost 

● The highest valued alternative that must be sacrificed to get something else

○ ONLY the next best option

■ You have a valued list of activities to choose from: 1) watching a movie, 2) going to the gym, 3) studying for a test

■ If you choose to watch the movie, the OC is going to the gym because it is the NEXT best option

4. Incentives 

● Incentive: something that changes how people act by altering their trade offs for a given decision ○ Can enforce continuing a behavior or stopping it!!

● Positive

○ Good grades, money, promotion

● Negative

○ Taxes, fees, getting fired, failing a class

5. Trade Creates Values

● People benefit from trade

○ We can all buy a greater variety of goods and services and will end up saving money ● Countries benefit from trade and specialization Don't forget about the age old question of How do you calculate thermal efficiency of a cycle?

○ Buy other goods more cheaply from abroad than could be produced at home ● Everyone is better off due to trade If you want to learn more check out What are the main reason why sexed semen is important?

Trade We also discuss several other topics like What does historical geology tells us?

● Specialization: you don’t have to do everything yourself, people specialize in what they’re best at (lowest opportunity cost) We also discuss several other topics like How do you find the probability distribution?

● Everyone trades the items that they’re good at

● Without trade, you would have to produce everything you consume

○ You would have to make your own food, clothing, housing, and electronics ○ You would have to services as well

■ Haircuts, dentistry, education

Thinking Like an Economist 

Two Roles of Economics

● Scientists: try to explain how the world works

○ Use the scientific method

■ 1) Observe a phenomenon, 2) develop a hypothesis, 3) construct a model, 4) design an experiment, 5) collect data, 6) verify/revise the hypothesis

● Policy advisors: try to improve how the world works

● Assumptions are used to simplify the world around us

○ Road maps exclude some information that is irrelevant to make it easier to understand ○ We use models

■ They’re good if they predict things accurately

● Ceteris Paribus: (“other things equal”)

○ Allows economists to examine the effect of one variable while keeping everything else constant

Economic Models 

● Circular Flow Diagram

○ Shows the movement of money and products through the economy in a very simplified way

○ Includes households & firms

○ Includes goods and services & factors of production

● Production Possibilities Frontier (PPF)

○ Shows the combination of two goods/services the economy can produce given the available factors of production and the availability of production technology

■ We assume technology and resources are fixed

○ Point ON the line and INSIDE the line are possible to produce

○ Points OUTSIDE the line are impossible to produce without an increase in resources or technology

PPF and Opportunity Cost

● Moving along the PPF involves shifting resources (labor) from the production of one good to the other

● Society faces a trade off between the two products that are being compared

● Slope of the PPF line tells us the opportunity cost of one good

● PPF Shape

○ Bow shaped as the economy shifts use of resources

PPF Review

● PPF graph shows the combination of two goods that are produced within an economy ○ Points inside the graph: inefficient use of all resources and technology ○ Points on the graph: efficient use of resources and technology

○ Points outside the graph: can’t be reached without an increase in resources or technology

● The PPF demonstrates trade-offs, opportunity cost, efficiency, inefficiency, economic growth (when there is additional resources and/or technology)

● A bow-shaped PPF illustrates the concept of increasing opportunity cost as the slope increases downwards; this happens as the line approaches the x-axis

The Economist as a Policy Advisor

● As scientists, economists make POSITIVE statements, which attempt to describe the world as it is

○ Positive statements can be proven or disproven, they are factual

○ Ex. Increased taxes for the upper class will increase tax revenues (can be proven true or false)

● As policy advisors, economists make NORMATIVE statements, which attempt to prescribe how the world should be

○ These are opinionated statements, they are based off individual thoughts ○ Ex. The lower class should be taxed more (an opinion statement)

Microeconomics vs. Macroeconomics 

● Microeconomics studies the individual units that make up the economy ○ Individuals, businesses, industries

● Macroeconomics studies the overall aspects and how the economy works ○ Big picture, whole economy

○ Inflation, economic growth, etc.

● If one person gets laid off, it is a microeconomic issue

● If a whole company gets laid off, it is a macroeconomic issue

Specialization and Exchange 

Comparative Advantage 

● The basis of exchange

● We can all have more of every good and service if we specialize in the activities we are relatively most efficient in

○ The lowest opportunity cost 

Absolute Advantage 

● Who can do the task the fastest

○ Harry has the absolute advantage for both painting a house and roofing

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