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Unformatted text preview: Econ 2030 FINAL Review-Study Guide Summaries Test One-Chapters 1, 2, 4, 5, 6 Chapter 1 • Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society • Three central coordination problems any economy must solve are what and how much to produce, how to produce it and for whom to produce it. Most economic coordination problems involve scarcity. • If the marginal benefits of doing something exceed the marginal costs, do it. If the marginal costs of doing something exceed the marginal benefits, don’t do it. This is known as the economic decision rule. o If MB>MC, do more of it because it’s worth it o If MB<MC, do less of it because it’s not worth it • Opportunity cost is the basis of cost/benefit reasoning; it is the benefit forgone, or the cost of the next-best alternative to the activity you’ve chosen. That cost should be less than the benefit of what you’ve chosen. o “What must be given up in order to get something else.” o They are often “hidden.” You need to take into consideration all opportunity costs when making a decision. • What happens in a society can be seen as the reaction and interaction of these 3 forces: o Economic Forces-the market forces of demand, supply, prices, etc. o Social and cultural forces-can prevent economic forces from becoming market forces o Political and legal forces-affect decisions too • Microeconomics is concerned with some particular segment of the economy. Macroeconomics is concerned with the entire economy. • Positive economics is the study of what is, and how the economy works-an objective analysis. • Normative economics is the study of what the goals of the economy should be, deals with what ought to be-a subjective analysis. • The art of economics is the application of the knowledge learned in positive economics to the achievement of the goals determined in normative economics. Chapter 2 • The production possibilities curve shows the trade-off (or opportunity cost) between two things. o The slope tells you the opportunity cost of good X in terms of good Y. • The principle of increasing marginal opportunity cost states that opportunity costs increase the more you concentrate on the activity. In order to get something, one must give up ever-increasing quantities of something else. (As you get more of X you have to give up more of Y) • The outward bow of the PPC is the result of comparative advantage. • Countries can consume more if they specialize in those goods for which they have a comparative advantage and then trade. o Country A can produce 30Y or 10X, while Country B can produce 20Y or 30X. Since Country A has a comparative advantage in Y, it should produce 30Y and Country B should produce 30X. They can then trade....
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This note was uploaded on 12/09/2009 for the course ECON 2030 taught by Professor Bong during the Spring '07 term at LSU.
- Spring '07