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Chapter 1 - 3 Study Guide

by: Sidney Hong

Chapter 1 - 3 Study Guide ECO 106

Marketplace > Pace University > Economcs > ECO 106 > Chapter 1 3 Study Guide
Sidney Hong
Principles of Economics: Macroeconomics
Cesar Castope

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Principles of Economics: Macroeconomics
Cesar Castope
Study Guide
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This 6 page Study Guide was uploaded by Sidney Hong on Wednesday September 30, 2015. The Study Guide belongs to ECO 106 at Pace University taught by Cesar Castope in Fall 2015. Since its upload, it has received 33 views. For similar materials see Principles of Economics: Macroeconomics in Economcs at Pace University.


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Date Created: 09/30/15
Fall 2015 Principles of Economics Micro EC0106 CRN 72490 MondayWednesday 900 AM 1025 AM Professor Cesar Castope Course Text O39sullivan Sheffrin Perez Microeconomics Principles Applications and Tools Eighth Edition PearsonPrentice Hall 2013 ISBN0l33403 87 Chapter 1 Introduction What Is Economics Learning Objectives 1 List the three key economic questions 2 Discuss the insights from economics for a realworld problem such as congestion 3 List the four elements of the economic way of thinking 4 List three ways to use macroeconomics 5 List three ways to use microeconomics Economics 0 Study of how people businesses governments and other organizations make choices when there is scarcity Scarcity 0 Resources we use to produce goods and services are limited Factors of Production 0 Natural resources 0 which are provided by nature and include land mineral deposits oil and gas deposits and water 0 Labor 0 human effort including both physical and mental effort used to produce goods and services 0 Physical capital 0 the stock of equipment machines structures and infrastructure that is used to produce goods and services 0 Human capital O the knowledge and skills acquired by a worker through education and eXperience and used to produce goods and services 0 Entrepreneurship O the effort to coordinate the factors of production to produce and sell products Economic analysis takes on two primary forms 0 Positive analysis 0 which answers the question What is or What will be 0 Normative analysis 0 which answers the question What ought to be Economics seeks to answer three primary questions 1 What products do we produce 2 How do we produce the products 3 Who consumes the products Economic models 0 A model is a simpli ed representation of an economic environment Marginal Change 0 Changing one variable a measure of something that can take on different values changes the economic outcome Ceteris Paribus 0 Latin eXpression that means to hold other variables fixed Four main elements to the economics way of thinking 1 Use assumptions to simplify 2 Isolate variables 3 Think at the margin 4 Rational people respond to incentives Macroeconomics o The study of the nation s economy as a whole Macroeconomists study questions of in ation unemployment and economic growth Three important reasons for studying macroeconomics are 0 To understand why economies grow 0 To understand economic uctuations c To make informed business decisions Microeconomics Studies the choices of individual economic agents such as households rms and governments 0 Studies how the choices made by these agents affect the market for goods and services Three important reasons for studying microeconomics are 0 To understand markets and predict changes 0 To make personal and managerial decisions 0 To evaluate public policies Finding the slope of a line 1 vertical iiiielzenee betArmin i lrce puinie 5mm 7 w hencen etdaemm between twepmnls equetiene ebeee all the semi cencepi Calculating percentage changes clLee 1ia39clnemmel cclmexm Peleenmgeehenge 1 J ljt39ciil39i39 u in we will nee 1le midneinl funnellzl rnewvalueinitieiwlme E r PteTeeniagdeehe ngequot E he El eecragecclue when Lhe agreement reins iii new wine 3 initial 1ia39elnej quotFl I39 Chapter 2 Key Principles of Economics Learning Objectives 1 Apply the principle of opportunity cost 2 Apply the marginal principle 3 Apply the principle of voluntary exchange 4 Apply the principle of diminishing returns 5 Apply the realnominal principle Five key principles of economics are as followed Principle of Opportunity Cost 0 The opportunity cost of something is what you sacri ce to get it The Marginal Principle 0 Increase the level of an activity as long as its marginal bene t exceeds its marginal cost 0 Choose the level at which the marginal bene t equals the marginal cost Principle of Voluntary Exchange 0 A voluntary exchange between two people makes both people better off Principle of Diminishing Returns 0 Suppose that output is produced with two or more inputs and we increase one input while holding the other inputs xed 0 Beyond some point called the point of diminishing marginal returns output will increase at a decreasing rate The Real Nominal Principle 0 What matters to people is the real value of money or income its purchasing power not the face value of money or income Opportunity Cost 0 The opportunity cost of something is what you sacri ce to get it 0 An opportunity cost can involve both time and money 0 Economists use the production possibilities curve to represent these costs 0 Chapter 3 Exchange amp Markets Learning Objectives 1 Use opportunity costs to explain the rationale for specialization and trade 2 Explain how markets allow specialization and trade 3 List the roles of government in a market economy Opportunity Cost 0 The opportunity cost of an item is what you must sacri ce to get the item To get more of one item you must sacri ce some other item Comparative Advantage 0 Trade is based on comparative advantage the ability of one person or nation to produce a good at a lower opportunity cost than another person or nation Absolute Advantage o The ability of one person or nation to produce a product at a lower resource cost than another person or nation Principle of Voluntary Exchange 0 A voluntary exchange between two people makes both people better off Import 0 Good or service produced in a foreign country and purchased by residents of the home country 0 An example of an import would be a Hyundai car which is produced in Korea and sold in the United States Export 0 Good or service produced in the home country and sold in another country 0 An example of an export would be agricultural products produced in the United States and sold in other countries Market Economy 0 One in which people specialize and exchange goods and services in a market There are a number of inventions that help markets work better 0 Contracts Specify terms of exchange and rights and obligations of the parties to the exchange 0 Insurance Reduces the risk from low probability random events such as res 0 Patents Encourage innovation in new products 0 Accounting rules Provide a common set of information on the nancial status of rm Centrally Planned Economy 0 One in which a government bureaucracy decides how much of each good to produce how to produce the good and who gets the goo o In a market system these same decisions are made in a decentralized manner with prices providing the information about relative scarcity and the incentive to provide goods by means of higher prices for goods that are relatively scarce Examples of Market Failures O Pollution 0 What happens when one person s action negatively impacts someone else 0 Government can force polluters to consider the costs they impose on others in the economy 0 An example would be a tax requiring polluters to bear the cost that their actions impose on others 0 The tax provides a nancial incentive for polluters to reduce the amount of pollution they produce 0 Public goods 0 What if we can t keep non payers from consuming a good such as a reworks display 0 What if more people could use a good at no additional cost of providing the good 0 How do markets respond in these cases 0 In most cases markets will not provide an appropriate amount of public goods which requires the government to step in and encourage production or in many cases produce the goods itself 0 Police protection would be an example of a public good 0 Imperfect information 0 What happens in a market if the buyers of a product know less about the product s condition than the sellers 0 Government can take steps to provide complete information so that both sides of the market can make an informed decision 0 For example the government requires that food manufacturers provide nutritional information on labels so consumers can know what is contained in the food they are eating 0 Imperfect competition 0 What happens when only a few rms exist in a market 0 Think about a utility that is the only provider of electricity in a particular area 0 Government will regulate the prices that the utility can charge so that it can t exploit its monopoly power The government plays other roles in the market economy as well including o Enforcing property rights 0 Reducing economic uncertainty and providing social insurance 0 Establishing and enforcing rules for market exchange


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