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AU - ECON 200 - Test 1 study guide - Study Guide

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AU - ECON 200 - Test 1 study guide - Study Guide

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background image Study Guide Chapters 1,2,3, & 4 Chapter 1 Incentives -Rational self-interest:  Benefits/cost change peoples’ choice changes,
only pertains to those that affect you, not others
- Seatbelt example: cost of reckless driving became less for self with 
new seatbelt legislation that made it illegal to drive without seatbelt 
(less likely to die if in an accident), so there were more accidents, 
especially involving pedestrians and others’ property 
- Incentives are a much stronger tool than persuasion alone (monetary  incentives) Electricity prices example: When companies started charging a fee for 
using more than a certain amount of electricity (incentive to not), 
many more people used less electricity as opposed to the government 
trying to persuade people to use less, but with no monetary penalty
Institutions Affect Incentives (society only changes with right 
- Institutions are organizations, customs, rules, laws, contract terms, 
taboos (explicit like laws, implicit like social norms), all institutions 
driven by money but that is not always a bad thing
-Good institutions create socially beneficial outcomes  Example: Wal-Mart re-routing majority of supplies to specific areas 
when there is a natural disaster prediction (Wal-Mart makes money off 
the people who buy up the supplies, but the people in need also have 
more supplies available to them)
-Bad institutions create socially destructive outcomes (institutional 
Example: Venezuela cheap toilet paper law led stores not to stock toilet
paper bc they would lose money and it became hard for all ppl to get 
toilet paper (no incentive for institution, public suffered) 
Opportunity Cost (is this activity worth the amount of time I’m giving 
up that I could spend doing something else?)
-Opportunity cost of going to college in a recession vs. in time of 
economic prosperity (enrollments rise during recessions bc if you hit 
the labor market straight out of hs you will likely be unemployed, and 
background image the opportunity cost is less to go to college bc you’re not losing money 
in that market, enrollments fall during economic prosperity bc 
opportunity cost is higher in salary you would lose from not joining 
labor market while in school)
Marginal Cost/Benefit 
-The more plentiful/common something is, the greater the marginal 
cost it generates as it accumulates and continued accumulation leads 
to marginal cost outweighing marginal benefit
-The more novel/ scarce something is, the more marginal benefit it has,
especially when it is first or only *see candy example in PowerPoint*
Example: Water vs. diamonds (water is plentiful and is constantly 
available & diamonds are rare, many ppl don’t have them or very few),
diamonds have more marginal benefit and marginal cost of water 
outweighs marginal benefit even though water is much more valuable 
for survival (only people at sustenance level deem water to have more 
marginal benefit)
-People are willing to pay more for things that have the highest  marginal benefit Marginal benefit is essentially what value a customer assigns to an 
Example: cost/ compensation that ppl willing to pay is based on 
whether skills are scarce (NFL quarterback) or relatively common 
Chapter 2 Division of Knowledge  - Trade allows people to specialize and gain advanced knowledge on any  given subject because they can trade for all the knowledge not within their 
own specialty (able to learn things beyond basic survival because everyone 
is not self-sufficient)
-Sharing of knowledge increases total knowledge available in a society  and overall standard of living  -A country becomes better the more they trade because it encourages  specialization and increases the influx of knowledge (allows people to focus 
on what they’re good at and rely on trade and other specialized people to 
make up for what they’re not good at) 
*see Alice and Bob 2-person society example in Powepoint*

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School: American University
Department: Economics
Course: Principles of Microeconomics
Professor: O Ozay
Term: Spring 2019
Name: Test 1 study guide
Description: Chapters 1. 2, 3, &4
Uploaded: 02/11/2019
6 Pages 273 Views 218 Unlocks
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