EC120 - Test 1 Exam-AID - Copy - EC120 TEST #1 EXAM-AID...

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Unformatted text preview: EC120 TEST #1 EXAM-AID Tutor: Jason “J- Dawg” Frittaion Coordinator: Alanna Davoren Some images used from course slides. 1 AGENDA Go through Chapters 1-6 • Intro to Economics and Opportunity Cost • PPF, Trade, and Comparative Advantage • Demand, Supply, and Price • Elasticity • Government Policy (Price Floors and Ceilings) 2 Intro to Economics and Opportunity Cost 3 A Few Qualitative Points • Economics is pretty much the study of motives and relationships that cause all the interactions of the market. • The economy is self-organizing through these motives (self-interest, incentives, etc.). When the economy is self-organizing, we consider it to be an open market (constantly striving for efficiency). • Land, labour, and capital are what produce the goods and services we consume (also known as factors of production). • These resources are however limited (scarcity). Therefore we must manage these resources, making decisions among our needs and unlimited wants. • Opportunity cost illustrates this concept of trade-off. 4 Opportunity Cost “The foregone benefits of the next best alternative.” These costs include explicit costs (out of pocket expenses such as paying for a movie ticket) and implicit costs (foregone earnings such as going to the movies versus working that night) They DO NOT include sunk costs (unrecoverable costs). These are basically the costs that must be incurred regardless of which course of action is taken. 5 EXAMPLE # 1 Answer : (b) WHY? If he hires a plumber and chooses to go to work, he will have to pay the plumber $200, which is an out of pocket expense; hence it will be included as an opportunity cost. If he does it himself, his foregone earnings that he could’ve made by working would be his opportunity cost. 6 EXAMPLE # 2 Answer : (b) WHY? Before the fertilizer was discovered, if the farmer had chosen to plant potatoes (5), he would have to give up the benefit of growing 10 corn. In other words, in order to grow 1 potato, he would have to give up 2 corn. Now that a new fertilizer has been discovered which doubles the per acre yield, in order to grow potatoes (10), he would have to give up the benefit of growing 20 corn. In other words, in order to grow 1 potato, you would have to give up 2 corn again. Same rule applies to the option of growing corn instead. 7 PPF, Comparative Advantage, and Trade 8 • Shows the combinations of goods that can be produced if all resources are fully employed. • Points inside the PPF are attainable, but you are not fully using your resources. • Points outside are unattainable and can only be attained by new technology or a stronger labour force . • Slope of the PPF indicates opportunity cost of the good on the x-axis....
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This note was uploaded on 12/18/2010 for the course ECONOMICS 120 taught by Professor Mesta during the Spring '10 term at Wilfred Laurier University .

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EC120 - Test 1 Exam-AID - Copy - EC120 TEST #1 EXAM-AID...

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