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Unformatted text preview: Brian Plancher September 27, 2009 Ec-10 Midterm #1 Review Guide • Textbook Unit 1: Introduction o Ch1: The Ten Principles Principle 1: People face trade offs • Efficiency vs. Equality of market (gov intervention?) Principle 2: Cost = what you give up • Opportunity Cost : what must be given up to get a good (whether monetary, other thing, or what can’t be made) Principle 3: Rational People think at the margin • Rational People : try to get the best out of everything • Marginal Changes : are small changes • Marginal Cost of adding a person into an empty seat in plane is cost of bag of peanuts, but Average Cost includes fuel and staff, etc. (but an empty seat still has average cost so companies sell the last seats cheap to fill planes often) Principle 4: People respond to incentives • Incentives : are something that pushes someone to act a certain way (either a reward or punishment often) • Strange example: seatbelts make people feel safer so drive more dangerously Principle 5: Trade makes everyone better off • Our international competition are also trade parteners Principle 6:Markets are good • Market Economy : allocates resources through the decentralized decisions of many firms and households Principle 7: Gov can help • Protects Property Rights to ensure people will trade and prevents Market Failure due to monopolies of Market Power or Externalities such as pollution. Principle 8: Standard of living in a country correlates with Production • Productivity , the measure of quantity of goods and services from each unit of labor can reflect standards of living. (need educated, skilled, tech supported workers) Principle 9: Gov prints money = price rises • Inflation increases the overall price in economies Principle 10: Short term is trade off b/t inflation and unemployment • Influences analysis of the irregular and largely unpredictable fluctuations in economic activity, the business cycle Text Box Notes: • Incentive pay leads to more efficiency (busses in Chicago don’t take shortcuts but they do in Chile) • Broken window fallacy (money would have been spent elsewhere than on window...don’t count jobs make them count) o Ch2: Thinking Like an Economist How People make decisions How People Interact How the Whole Economy Works The scientific method: rely on theories built form observation but most times can’t run experiments to test theories. Assumptions are used: price goes form inelastic to elastic over time Model #1: Circular Flow Diagram : • • Firms produce goods from inputs (factors of productions ) • In markets for goods and services (firms sell, households buy) • In market for factors of production (households sell, firms buy) Model #2: Production Possibilities Frontier • Graph that shows the tradeoff between two outputs (meat and potatoes for example) • Economy is efficient if it is on the frontier and thus getting all it can and not in the middle...
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