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Unformatted text preview: ECON 1101 Handout: Midterm I Notes These notes are only a partial summary of what was covered in lecture and in homeworks. These notes are not a substitute for your own notes from lecture and I reserve the right to test you on lecture or homework material not listed here. 1 Introduction 1.1 Definitions Economics the study of rational decision making under conditions of scarcity Scarcity means that resources are limited (wants are greater than the resources available to satisfy those wants) Rational Agent One who maximizes their own well-being within limits allowed by constraints (scarcity) Microeconomics the study of how individual households (or consumers) and firms make decisions Macroeconomics the study of the behavior of the overall economy (economic aggregates) Positive Statement tries to describe how the world (or economy) works. (A testable statement- what is or what will be). Normative Statement a claim of how the world (or economy) should work. (A value judgment- what ought or ought not to be). 1.2 Concepts Economics as a science: Uses models to address economic problems A model is a simplification of a complex reality Must make assumptions about what factors to include or ignore Assumptions: 1 ECON 1101 - Midterm I Notes Amanda M Michaud All assumptions are false, but some are more useful than others Good assumptions are... 1. Not ad-hoc ( not specific to only one situation, leading to clearly false results in others. ) 2. Testable 2 Gains from Trade 2.1 Definitions Production Possibilities Frontier (PPF) A curve representing the maximum combination of outputs that can be produced with given available factors of production and technology. Attainable Any point inside the PPF is attainable, ie: it can be produced with the given technology and resources. Efficient Any point ON the PPF is efficient, ie: it uses inputs and technology to their fullest ability. Opportunity Cost (OC) the opportunity cost of a decision is the value of the next best alternative given up because of the decision. Composite Good A good that represents many goods or services. Absolute Advantage An individual has absolute advantage in the production of a good if the individual can produce the good using few inputs than someone else. Comparative Advantage An individual has comparative advantage in the production of a good in the individual has a lower opportunity cost to produce the good than the other person. Autarky When no trade takes place. (Consumption = production) Specialization Produce more of the good you have comparative advantage in. Terms of Trade Range of relative prices under which trade will take place. 2.2 Concepts Benefits of Trade: Both individuals (or countries) benefit if they specialize in some activity and trade output with others....
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- Spring '07
- Supply And Demand, Amanda M Michaud