EC120 Midterm 1 Exam Aid
Session
Taught by: Eric Presacco
Kristopher Klinck
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AGENDA
1.
2.
3.
4.
5.
6.
Ten principles of Economics
Thinking like an Economist
Interdependence and the gains from trade
The market forces of Supply and Demand
Elasticity and its application
Supply, Demand, and Government policies
– Answer any questions
– A few examples
– Leave you with the package
6
Chapter 1
Ten Principles of Economics
7
How people make decisions
1. People face tradeoffs
–
Going to fox on Tuesday when you have an exam the next day
2. The cost of something is what you give up to get it
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The opportunity cost of a good or service is what is given up to obtain it
3. Rational people think at the margin
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Can make marginal changes (incremental adjustments) to an existing plan, in order to reach the best objective
4. People respond to incentives
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Incentives are things that induce someone to act
8
How people interact
5. Trade can make everyone better off
– Increase efficiency by specializing in the production of a few goods
6. Markets are usually a good way to organize economic activity – Groups of buyers and sellers in various locations
– Adam Smith’s Invisible hand- promotes economic well-being
7. Governments can sometimes improve market outcomes
– To promote efficiency (expand the economic pie) & equity (change how the pie is divided)
9
Macroeconomic Concepts
8. A country’s standard of living depends on its ability to produce goods and services
– Productivity- the amount of goods and services produced from each hour of work
9. Prices rise when the government prints off too much money –
Each dollar now carries less value (you can buy less with 1 dollar)
10. Society faces a short-run tradeoff between unemployment and inflation
10
Chapter 2
Thinking Like an Economist
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Thinking Like An Economist
• Economics is pretty much the study of motives and relationships that cause all the interactions within the market.
• The economy is self-organizing through these motives (self-interest, incentives, etc.) • When the economy is self organizing, we consider it to be an open market
(Constantly Striving for Efficiency)
12
Thinking Like An Economist
• Land, labour, and capital are what produce the goods and services we consume (also known as factors of production).
• These resources are however limited (scarce), and must be managed, so we must make careful decisions among our needs and limited wants.
• An Opportunity Cost is what illustrates these trade-offs. 13
Opportunity Cost
• Opportunity Cost: The foregone benefits of the next best alternative
– Include explicit costs (out of pocket expenses such as paying for a movie ticket), and implicit costs (foregone earnings such as going to the movies versus working that night) – DO NOT include sunk costs (unrecoverable costs.) These are basically the costs that must be incurred regardless of which course of action is taken.
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Example #1 (Opportunity Cost)
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Answer to Example 1
• The answer is B!
• If he hires a plumber and chooses to go to work, he will have to pay the plumber $200 (explicit
