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Final Exam Notes - Final Exam Notes CHAPTER 1 the study of...

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Final Exam Notes CHAPTER 1 - Scarcity – the resources we use to produce goods and services are limited - - – the study of choices when there is scarcity o Scarcity and the trade-offs associated with making choices - Factors of production – resources used to produce goods and services o Natural resources – provided by nature (land) o Labor o physical capital – equipment, machines o human capital – the knowledge and skills acquired by a worker thru education and experience o entrepreneurship – the effort used to coordinate the factors of production to produce and sell products - positive analysis – answers the question “what is?” or “what will be?” (if the gov’t increases the minimum wage, how many workers will lose their jobs?) o economists don’t always reach the same conclusions here - normative analysis – answers the question “what ought to be?” – opinions (should the gov’t increase minimum wage?) - the 3 key economic questions 1. what products do we produce? 2. How do we produce the products? 3. Who consumes the products? - Economic model – a simplified representation of an economic environment, often employing a graph – explores the choices ppl make and the consequences of those choices - the 4 elements of the economic way of thinking 1. use assumptions to simplify but we must think carefully about whether an assumption is truly harmless
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2. isolate variables – ceteris paribus economic analysis often involves variables and how they affect one another – a variable is a measure of something that can take on diff values Alfred Marshall – ceteris paribus – other variables are held fixed o 3. Think at the margin o 4. Rational people respond to incentives – when the payoff from doing something changes, people change their behavior to get the benefit - Adam Smith = founder of economics CHAPTER 2 - Production possibilities curve – shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and efficiently used o Curved outward b/c resources aren’t perfectly adaptable for production of both goods - Marginal benefit – the additional benefit resulting from a small increase in some activity - Marginal cost – the additional cost resulting from a small increase in some activity - Marginal principle – increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost - Principle of voluntary exchange – a voluntary exchange btw two people makes them both better off o based on the notion that people act in their own self-interest - principle of diminishing returns – output will increase at a decreasing rate when we increase ONE input while holding the other inputs fixed o with a fixed amount of machines, diminishing returns happens when you add more workers
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- real-nominal principle – what matters to people is the real value of money or
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