EC120 Midterm 1 Exam Aid
Session
Taught by: Eric Presacco
Kristopher Klinck
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AGENDA
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Ten principles of Economics
Thinking like an Economist
Interdependence and the gains from trade
The market forces of Supply and Demand
Elasticity and its application
Supply, Demand, and Government policies
– Answer any questions
– A few examples
– Leave you with the package
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Chapter 1
Ten Principles of Economics

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How people make decisions
1. People face tradeoffs
–

Going to fox on Tuesday when you have an exam the next day

2. The cost of something is what you give up to get it
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The opportunity cost of a good or service is what is given up to obtain it

3. Rational people think at the margin
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Can make marginal changes (incremental adjustments) to an existing plan, in order to reach the best objective

4. People respond to incentives
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Incentives are things that induce someone to act
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How people interact
5. Trade can make everyone better off
– Increase efficiency by specializing in the production of a few goods

6. Markets are usually a good way to organize economic activity – Groups of buyers and sellers in various locations
– Adam Smith’s Invisible hand- promotes economic well-being

7. Governments can sometimes improve market outcomes
– To promote efficiency (expand the economic pie) & equity (change how the pie is divided)

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Macroeconomic Concepts
8. A country’s standard of living depends on its ability to produce goods and services
– Productivity- the amount of goods and services produced from each hour of work

9. Prices rise when the government prints off too much money –

Each dollar now carries less value (you can buy less with 1 dollar)

10. Society faces a short-run tradeoff between unemployment and inflation

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Chapter 2
Thinking Like an Economist

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Thinking Like An Economist
• Economics is pretty much the study of motives and relationships that cause all the interactions within the market.
• The economy is self-organizing through these motives (self-interest, incentives, etc.) • When the economy is self organizing, we consider it to be an open market
(Constantly Striving for Efficiency)
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Thinking Like An Economist
• Land, labour, and capital are what produce the goods and services we consume (also known as factors of production).
• These resources are however limited (scarce), and must be managed, so we must make careful decisions among our needs and limited wants.
• An Opportunity Cost is what illustrates these trade-offs. 13

Opportunity Cost
• Opportunity Cost: The foregone benefits of the next best alternative
– Include explicit costs (out of pocket expenses such as paying for a movie ticket), and implicit costs (foregone earnings such as going to the movies versus working that night) – DO NOT include sunk costs (unrecoverable costs.) These are basically the costs that must be incurred regardless of which course of action is taken.

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Example #1 (Opportunity Cost)

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Answer to Example 1
• The answer is B!
• If he hires a plumber and chooses to go to work, he will have to pay the plumber $200 (explicit