ECON 1150 - ECON 1150 Exam 1 Study guide Chapters 1, 2, 3...

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ECON 1150 Exam 1 Study guide Chapters 1, 2, 3 and 17 Chapter 1- What is Economics? 1. Idea 1: How much does it really cost? Economists say that the true costs of such decisions are not the number of dollars spent on the item, but rather the value of what must be given up in order to acquire that item. These are called opportunity costs. Opportunity costs the next best alternative forgone These are called opportunity costs because they represent the opportunities the individual, firm, or government must forgo to make the desired expenditure EXAMPLE: Tiger Woods did not graduate from Stanford. Although his typical costs such as dorms, tuition, books, etc. were very low ($200) due to his full ride scholarship, his opportunity costs were very high due to the amount of money he would be paying in the professionals to play golf (millions of dollars) When looking at opportunity costs of going to college or not going to college, you would not necessarily look at the amount of money it costs to live in a dorm and a meal plan when adding opportunity costs up, because you would still need a house and food. Rather, you look at the difference between the two prices. 2. Idea 3: The surprising Principle of Comparative Advantage. China today produces many products that Americans buy in huge quantities (toys, textiles, and electronics). American manufacturers often complain about Chinese competition and demand protection from the flood of imports that threaten American standards of living. Economists think this view is not justified. They maintain that both sides normally gain from international trade. But what if Chinese were able to produce everything more cheaply than we can? Wouldn’t Americans be thrown out of work and our nation be impoverished? A remarkable result called the law of comparative advantage, shows that even in this extreme case, the two nations can still benefit by trading and that each can gain as a result. EXAMPLE: Suppose Sally grows up on a farm and is a whiz at plowing. But she is also a successful country singer who earns $4,000 per performance. Should sally turn down singing engagements to leave time to work in the fields? --- Of course not! Instead, she should hire Alfie, a much less efficient farmer, to do the plowing for her. Sally may be better at plowing but she earns so much more by singing that it makes sense for her to specialize in that and leave farming to Alfie. Although Alfie is a less skilled farmer than Sally, he is a even worse singer. So Alfie earns his living in the job at which
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ECON 1150 Exam 1 Study guide Chapters 1, 2, 3 and 17 he at least has a comparative advantage, and both Alfie and sally gain. Absolute Advantage vs. Comparative Advantage
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ECON 1150 - ECON 1150 Exam 1 Study guide Chapters 1, 2, 3...

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