Econ Exam 1.docx - Chapter 1 1 Incentives matter Incentives...

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Chapter 1: 1). Incentives matter, Incentives: rewards and penalties that motivate behavior. 2). Good Institutions Align Self-Interest with the Social Interest, “ Invisible Hand”, People working for their own self- interest often produce outcomes that help society as a whole(Wal-Mart) 3). Trade-offs are everywhere, all decisions involve trade-offs, Drug lag: you die because a safe drug has not yet been approved. Drug loss: you die because a safe drug is never developed. Opportunity cost : the loss of potential gain from other alternatives when one alternative is chosen 4). Thinking at the margin, Margin=Additional or extra, look at the change 5). The power of trade, both parties gain from trade(self-sufficiency=subsistence). Chapter 2 & 21: 3 benefits of trade: 1). Trade makes people better off when preferences differ. 2). Trade increases productivity through specialization and the division of knowledge. 3). Trade increases productivity through comparative advantage. Absolute advantage: is the ability to produce the same good using fewer inputs than another producer. Production Possibilities Frontier(PPF): shows all the combinations of goods that a country can produce given its productivity and supply of inputs. A country has a Comparative Advantage in producing goods for which it has the lowest opportunity cost. High-productivity countries have
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