MICROECONOMICS MIDTERM 1 REVISION.docx - MICROECONOMICS...

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MICROECONOMICS MIDTERM 1 REVISION: Economics: the study of optimal choices under conditions of scarcity due to unlimited wants & limited resources LIMITS, ALTERNATIVES & CHOICES The economic perspective o Scarcity & choice Opportunity cost—because of scarcity of resources trade-off is inevitable; resources have opportunity cost o Purposeful behavior Rational self-interest—people look for & exploit opportunities to increase their utility o Marginal analysis Comparing marginal benefit(MB) of an action w/ its marginal cost (MC) o MB=MC optimum level of an activity The scientific method o Observing real-world behavior and outcomes o Formulating hypothesis based on observation o Testing the hypothesis by comparing outcomes of specific events to the outcome predicted by the hypothesis o Accepting/rejecting/modifying hypothesis based on comparisons o Continue testing the hypothesis favorable results hypothesis is now a theory well tested theory economic law/principle Economic principles o Generalizations—relate to economic behavior & economy o Other-things-equal assumption : assumption that factors other than those being considered do not change o Graphical expression—economic models are expressed graphically Micro vs Macro o Micro Smaller, discrete economics agents & their reactions to changing events Particular, individual markets & economic segments Ex: consumer’s behavior, firms decisions o Macro Wider view of economy & the economic activity Ex: unemployment, inflation, national output, AD Positive economics: deals with areas of the subject that are capable of being proven to be correct or not Normative economics: deals w/ areas of the subject that are open to personal opinions and beliefs The individual economizing problem: the need to make choices because economic wants > economic means Economic resources/ factors of production o Land: natural resources used to produce goods & services
o Labor: people’s physical & mental talents and efforts that are used to help produce goods and services o Capital: human-made resources used to produce goods & services; goods that indirectly satisfy human wants Ex: buildings, machines, equipment o Entrepreneurial ability: human resource that combines other resources to produce a product, makes non-routine decisions, innovates & bears risks Production Possibility Curve/frontier (PPC/F) o shows trade-offs facing an economy that produces only 2 goods o Shows the max. quantity of one good that can be produced for any given quantity produced of the other o Illustrates efficiency Efficiency : there are no missed opportunities in production—there is no way to produce more of one good without producing less of other goods o Is a reminder of opportunity cost o Economic growth: economic growth means an expansion of the economy’s production possibilities, the economy can produce more of everything Affected by factors of production and progress in technology

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