Econ Test 1 Study Guide

Econ Test 1 Study Guide - Econ Test 1 Study Guide Chapter...

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Econ Test 1 Study Guide Chapter 1: Economics : study of how people make choices under conditions of scarcity and of the results of those choices for society Microeconomics : is the study of how people make choices under conditions of scarcity Designed to make people make better choices The rationality assumption : people have goals and try to fulfill them as best they can might make wrong choice due to lack of information Assume: 1. People are rational a. They will make the best decision with the information available 2. People respond to incentive 3. Optimal decisions are made at the margin Scarce : a good is scarce when something must be given up in order to obtain the good usually implies an either/or strategy, it it wasn’t for scarcity choices wouldn’t need to be made 1. Limited resources 2. Unlimited wants The scarcity principle (No-Free-Lunch Principle ): although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another. The cost-benefit principle : an individual should take an action if, and only if, the extra benefits are at least as great as the cost. Cost-benefit analysis : c(x)=cost of doing x b(x)=benefits of doing x If b(x) > c(x) do activity If c(x) > b(x) don’t do activity The Incentive Principle: a person is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. Graphical representation : in this model we are looking at decisions made by people. This process involves two sides: the benefit of the activity the cost of the activity A graph can represent a theory (or models) that we frequently use in economics. It is just a simplified representation or abstraction of the world Cost (opportunity cost): highest valued foregone alternative value of what must be forgone in order to undertake the activity Total cost: cost of all vs. cost of none the total cost of undertaking n units of an activity divided by n Marginal cost: added or incremental cost of a bit more MC=ΔTC the increase in total cost that results from carrying out on additional unit of an activity Principle of Rising MC: Doing more of an activity with in a given time period will cause both the TC and MC to rise on a graph it is a straight line just like the supply line
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Benefits: any advantageous or desirable consequence of an action Total Benefits: all vs. none the total benefit of undertaking n units of an activity dived by n Marginal benefits: change per increment in benefits of an additional unit MB=ΔTB the increase in total benefit that results from carrying out one additional unit of an activity Principle of diminishing MB: doing more of an activity within a given period causes total benefits to rise but at a diminishing rate Decision rule: MB > MC continue – MC>MB do less – MC=MB optimal/stop Optimal decision: is when MC=MB because net benefits are maximized
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This note was uploaded on 04/30/2011 for the course ECON 211 taught by Professor Johnson during the Spring '07 term at Clemson.

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Econ Test 1 Study Guide - Econ Test 1 Study Guide Chapter...

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