Exam 1 Review Sheet

Exam 1 Review Sheet - Exam 1 Review Sheet Incentive o...

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Exam 1 Review Sheet Incentive o Something that induces a person to act o Ex. Punishment/ reward Prices, profits and losses in an market economy o Rational people respond to incentives since they make decisions by comparing costs and benefits o Higher price in a market provides an incentive for buyers to consume less and an incentive for sellers to produce more o Economists emphasize that consumer and firms consistently respond to incentives Rational Choice o Economists generally assume people are rational Assume that consumers and firms use all available information as they act to achieve their goals Rational individuals weigh benefits and cost of each action and choose action only if benefits outweigh costs Scarcity o Means society has limited resources and therefore cannot produce all the goods and services people wish to have o Wants are unlimited; resources available to fulfill those wants are limited Trade-offs o Producing more of one good/service means producing less of another o Often a trade-off between efficiency and equity Voluntary Exchange o Buyer and seller exchange a product in a market and as a result both are made better off by transaction Factors of Production [Payments] o Land [rent] Natural resources, weather, plant, animal life, real estate, etc o Labor [wages] Work that people must do in order to produce things o Capital [interest] Man-made machines, tools, and structures that aren’t directly consumed but are used to produce other things that people do directly consume Includes factories, roads, sewers, electrical grids, internet, etc Human Capital: knowledge and skills that people use to help produce output High human capital (skilled workers are an example): produce much better or much more than a person w/ low human capital (unskilled) o Entrepreneurial ability [profit; net income] Ability and willingness on the part of people to figure out new and better products to meet the desires of consumers and new and better was to produce
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Production o All processes by which human labor creates goods and services and brings them to ultimate consumer Positive Analysis o Testable; positive questions are those that can be tested o Uses economic models to estimate benefit and cost of a particular action o Concerned with what is o Economics is about positive analysis which measures costs and benefits of different courses of action Normative Analysis o Not testable; opinionated o Not essential component of an economic model o Answers the questions “ what ought to be o Person’s values and political views have impact Macroeconomics o Looks at economy as an organic whole o Concentrates on economy-wide factors such as interest rates, inflation, and unemployment o Encompasses the study of economic growth and how governments use monetary and fiscal policy to try to moderate the harm caused by recessions
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This note was uploaded on 02/06/2012 for the course ECON 1015 taught by Professor Myounglee during the Spring '08 term at Missouri (Mizzou).

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Exam 1 Review Sheet - Exam 1 Review Sheet Incentive o...

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