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Midterm 1 - MICROECONOMICS MIDTERM ONE FEB 18TH CHAPTER ONE...

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MICROECONOMICS: MIDTERM ONE- FEB 18TH CHAPTER ONE AND TWO: An introduction to Economics What is Economics about? 1. Scarcity: The limited nature of a societies resources 2. Economics: The study of how a society manages those scarce resources e.g. How people decide what to buy, how firms decide how much to produce, how society decides how to divide its resources THE 7 PRINCIPLES OF MICROECONOMICS 1. People Face Trade-Offs -Cause: Scarcity exists in all societies which means that all decisions involve some kind of trade- off. Therefore, scarcity causes trade-offs. -E.g. Efficiency vs. Equality Efficiency: Getting the most from your resources Equality: When prosperity is distributed uniformly amongst society members Trade-Off= To achieve greater equality, you could redistribute income from wealthy to poor. But this then reduces the incentive for the wealthy to work harder and produce, therefore this shrinks the size of the economic “pie”. 2. The Cost of Something is What You Give Up to Get it - Cost of an Action: What you give up to get it. E.g. The cost of coming to class today was that I had to give up that extra hour that I could of been spending sleeping. - Making decisions requires comparing the costs and benefits of alternative choices. - The opportunity cost of an item is whatever must be given up to obtain it. Opportunity cost is the relevant cost of making decisions. Examples: a) The opportunity cost of going to college for a year is not just the tuition, books, and fees, but also the foregone wages, such as that if you weren’t in college you could be working and making wages. b) The opportunity cost of seeing a movie is not just the price of the ticket but the value of the time you spend in the theater, because you could of been spending this time doing something more productive with your time. 3. Rational People Think at the Margin * This goes along with the idea of opportunity cost, because it the opportunity cost of an action influences the action you choose to take. - Rational people : Systematically and purposefully do the best they can to achieve their objectives. - If you have an objective the idea is that you should assess the costs and benefits of and action, and you should only act if the benefits outweigh the costs. This is called making decisions by evaluating the costs and benefits of marginal changes , these are incremental adjustments to an existing plan. Examples:
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MB= Marginal Benefit MC= Marginal Cost a) If MB exceeds MC then we should take this action. b) If MB is less than MC then we should not take this action. c) When a student considers whether to go to college for an additional year he compares the fees and foregone wages to the extra income he would earn in the long-run from obtaining a college education. The MC is the fact that he has foregone wages, and that he has to pay tuition, however the MB is that in his life time he will most likely make more money because he is better trained and will therefore get a higher paying job.
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