Final Exam Review Sheet - Ian Overbaugh 4/1/2008 Chapter 1:...

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Ian Overbaugh 22:48:19 Economics Review Sheet Chapter 1: Economics: Foundations and Models Marginal Thinking: Optimal decisions are made on the margin. At a lower cost, people will engage in risky behavior Positive Analysis: What “is” Normative Analysis: What “ought” to be Scarcity: condition of limited resources and unlimited wants People Respond to incentives: people act differently when faced with different decisions Rationality: consumers and firms use all available information as they act to achieve their goals Productive Efficiency: goods produced at the lowest cost Allocative Efficiency: production reflects consumer preferences Centrally Planned Economy: An economy in which the government decides how economic resources will be allocated Market Economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources Mixed Economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in the allocation of resources Does the economic assumption of rationality mean that people are selfish, or does it allow for altruism? Do you think the assumption is realistic? What is the test of a model? Does it have anything to do with the assumptions? Chapter 2: Trade-Offs, Comparative Advantage, and the Market System Opportunity Cost: the highest valued alternative that must be given up to engage in an activity Production possibilities frontier: A curve showing the maximum attainable combinations of two products that may be produced with available resources Comparative Advantage: the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers; trade is based off comparative advantage Absolute Advantage: The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources Specialization: Specialize in producing one good at the opportunity cost of the other Gains from Trade: Made better off by trade rather than being by yourself Why is opportunity cost the highest-value alternative forgone when you choose a course of action and not all the alternatives forgone? What is the connection between scarcity and opportunity cost? How does a production possibilities frontier embody the concept of opportunity cost? What things can cause the production possibilities curve to shift? How do private property rights affect the incentives to produce? Chapter 3: Interaction of Demand and Supply Law of Demand: The lower the price of a good or service, the more people are willing to buy it, all else constant Factors that shift the demand curve: Price of related goods: o A decrease in the price of a substitute causes the demand curve for a good to shift to the left o A decrease in the price of a compliment causes the demand curve for a good to shift to the right Income: [1]
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Ian Overbaugh 22:48:19
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This note was uploaded on 03/31/2008 for the course ECON 002 taught by Professor Mcleod,markpehlivan,ayseozg during the Fall '08 term at Pennsylvania State University, University Park.

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Final Exam Review Sheet - Ian Overbaugh 4/1/2008 Chapter 1:...

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