ECON 2110 Midterm Study Guide: Key Concepts and Tips

Opportunity Cost

The value of the next best alternative forgone when making a decision.

Marginal Cost/Benefit

Decisions are made by comparing the additional (marginal) benefits to the additional (marginal) costs.

Scarcity

Arises when wants exceed available resources, necessitating trade-offs.

Rational decision-making

Involves selecting options that maximize utility given constraints.

Comparative Advantage

A country or individual has a comparative advantage when it can produce a good at a lower opportunity cost than another.

Trade benefits

All parties benefit when they specialize based on comparative advantage and trade at mutually beneficial rates.

Demand Shifters

Changes in preferences, income, price of related goods (substitutes or complements), and expectations.

Supply Shifters

Changes in input costs, technology, taxes, and number of sellers.

Complementary goods

See a rise in demand when the price of one decreases.

Substitute goods

See a rise in demand when the price of one increases.

Positive Statements

Descriptive, fact-based assertions about the world.

Normative Statements

Value-based, subjective assertions about what ought to be.

Production Possibilities Frontier (PPF)

Points on the curve represent efficient use of resources.

Inefficiency in PPF

Points inside the curve indicate inefficiency; points outside are unattainable without growth.

Economic Models

Use models to predict behaviors, such as how incentives affect decisions.

Decision Analysis

Understanding trade-offs using marginal principles.

Trade Scenarios

Calculating opportunity costs and identifying mutually beneficial trade agreements.

Market Dynamics

Identifying effects of demand and supply shifts on prices and quantities.

Behavioral Predictions

Evaluating how external factors (e.g., policies, price changes) influence economic decisions.

Production and Costs

Analyzing costs and benefits for production and consumption.

Applications of Comparative Advantage

Determining which party should specialize in a given task based on opportunity costs.

Consumer Choice and Pricing

Understanding consumer rationality and price elasticity implications.