MicroEcon Final Study Guide.docx - MicroEcon Study Guide...

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MicroEcon Study Guide Chapter 1 Scarcity : wants are unlimited, but resources to fill those wants are limited Economics : study of the choice consumers, businesses, governments methods for achieving goals given scarce resources Economic models : simplified versions of reality to help us understand functioning of real world Question we always ask: How do we allocate our scarce resources? To Develop an Economic Model : 1. Decide on assumptions to use in developing the model a. Economic value : something measurable that can have different values - like income of doctors 2. Create a hypothesis 3. Use economic data to test hypothesis 4. Revise if not proven or supported Keep model to help more questions Market : group of buyers or sellers of a good or service and the institution or arrangement by which they come together to trade - Buyers and sellers comprise of: households, firms, individuals, government Market definition is specific about: - Geographical boundaries - Identify and understand competition and buyers - Boundaries in terms of range of products produced and sold within in Three Key Economic Ideas 1. People are rational a. The idea that people weigh the cost and benefits or each action, and they choose an action only if benefit outweighs cost a. Make use of all available information b. Make choices from available options to achieve their own goals 2. People respond to economic incentives a. People are more likely to choose a given option if benefit is increased and/or cost is decreased 3. Optimal decisions are made at the margin - Marginal is added - like working an extra hour or adding one more employeethe small incremental value - The optimal decision is made when marginal cost is equal to marginal benefit MB=MC - Marginal analysis The Economic Problem That Every Society Must Solve Trade-offs : producing one or more good or service that results in producing less of another good or service - The general idea that you have to give something up Opportunity cost : the highest-valued alternative that must be given up to engage in an activity - The value of what you give up - the number amount When thinking of trade-offs: Three Key Problems: 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced? a. Depends on how income is distributed Answer: centrally planned economy or market economy Centrally planned economy : gov’t decides allocations of resources, goods/services
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Market economy : decisions of households and firms interacting in market determine allocation of “Mixed” Economy : economic decisions result from interaction of buyers and sellers in the market but govt plays role in allocation of resources - Market economies tend to be efficient because they promote competition and facilitate voluntary exchange.
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