ECON 101 Midterm #1 Study Package

Chapter 1: What is Economics Economics: Social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. (Parkin & Robin, 2022) 1) Scarcity - Inability to satisfy all our wants 2) Choices - Due to scarcity, choices must occur 3) Incentives - Reward that encourages an actions or penalty that discourages and action Microeconomics : Study of choices that individuals and businesses make and how they interact/influence in markets and government. Macroeconomics: Study of the performance of the national and global economies. Two Big Economic Questions: 1) How do choices end up determining what, how, and for whom goods and services are produced? 2) When do choices made in the pursuit of self- interest also promote social interest? Goods and services - objects that people value and produce to satisfy human wants and needs (Parkin & Robin, 2022) WHAT? Goods and services (objects that people value and produce to satisfy human wants) - They can vary depending on the country and time period Ex. Canada 2% in agriculture vs. China 8% respectively, 28% in manufactured and 41% manufactured goods HOW? Produced by using resources known as factors of production. Factor of Production: 1) Land - Gift of nature (Earns rent ) 2) Labour - Time and work effort that people devote to producing goods and services (Earns wages ) Quality of labour depends on human capital - based on knowledge and skills from education, training and experience. 3) Capital - Tools, instruments, machines, buildings, and other objects used to produce goods and services (Earns interest ) 4) Entrepreneurship - Human resources to organize land, labour and capital (Earns profit ) Ex. HP - originally came from students who pitched it to the professor who told them it would never work. WHOM? - Depends on the incomes that people earn for goods and services Self Interest may lead to Social Interest based on choices Based on the quantity, factors of production, and benefits of goods & services

Self Interest: Choices that are in your self - interest based on choices that you think are best for you Social Interest: Choices that are best for society as a whole, based on efficiency and equity Ex. Which one is best for social interest and self-interest if the PROF lives by the school? 1) Walk 30 mins to work <- Social interest, better for the environment, and society 2) Bike 15 mins to work 3) Car (Drive) 5 mins to work <- Self-interest, faster, convenient Economic Way of Thinking: 1) A choice is a tradeoff: giving up one thing to get something else 2) People make rational choices by comparing benefits and costs 3) Benefit is what you gain from something 4) Cost is what you must give up to get something 5) Most choices are “ how-much” choices made at the margin 6) Choices respond to incentives Choice is a tradeoff: places scarcity and implications, choice, at central stage (Parkin & Robin 2022) ● Ex. Either spending allowance money on a new jacket or a new pair of shoes Rational Choice: compares cost and benefits and achieves the greatest benefit over cost for person making choice ● The wants of a person drive the rationality of a choice ● Answers the question of what goods and services will be produced (answer: whatever people rationally choose to buy) Benefit: gain or pleasure that it brings and is determined by preferences ● Preferences: what a person likes and dislikes and intensity of those feelings Cost: something that you have to give up on Opportunity cost: the highest valued alternative that must be given up to get something Example: 1) The things you can’t afford to buy if you purchase the AC/DC tickets 2) The things you can’t do with your time if you go to the concert Marginal Benefit: To make a choice at the margin - evaluate the consequences of making incremental changes, benefit from pursuing an incremental increase in an activity ● Measured by the amount that a person is willing to pay for an additional unit of good or service (additional benefit of buying one more unit of the good or service) Marginal Cost: The opportunity cost of pursuing an incremental increase in an activity

Marginal benefit > Marginal cost Your rational choice is to do more of that activity ● △ in marginal cost or change in marginal benefit △ the incentives that we face and leads us to change our choice ● Central idea of economics is that we can predict how choices will change by looking at △ by looking at changes in incentives (Parkin & Robin 2022) Positive Statements (what is) Normative Statements (what ought to be) ● Can be tested by checking it against the facts, might be right or wrong ● Ex. One Minute Maid apple juice box contains 21g of sugar. ● Depends on values and cannot be tested, can agree or disagree with it ● Ex. Apple juice is better than orange juice. Economic Models ● Description of some aspect of the economic world that includes only those features that are needed for the purpose at hand ● Tested by comparing its predictions with the facts (Parkin & Robin 2022) ● Economists test economic models using natural experiments, statistical investigations and economic experiments

Chapter 1: Appendix Graphs: ● Reveals a relations, by representing a quantity as a distance ● Zero point is origin ○ Vertical line is y-axis ○ Horizontal line is x-axis Scatter Diagram: ● Plots the value of one variable against the value of another variable for a number of different values of each variable ● Relationship between two variables Variables that Move in the SAME Direction Variable that Move in OPPOSITE Direction Variable that have a MAXIMUM or a MINIMUM Variable that are UNRELATED ● Positive relationship/ Direct relationship ● Line slopes upwards ● Negative relationship/inver se relationship ● Line slopes downwards ● Relationships are positive over part of their range and negative over the other part ● Emphasize that two variables are unrelated Slope: ● Relationship is the change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis ● Δ Capital DELTA – represent change in OR Rise or Run ( △ y / △ x) ● Calculate the slope of a curved line either at the point or across an arc ● Slope Across an Arc: The average slope of a curved line across an arc is equal to the slope of a straight line that joins the endpoints of the arc. Multiple Variables: ● When two or more variables are involved, plot relationship between two variables while holding other variables constant ● Ceteris Paribus: if all other relevant things remain the same Linear Equations: ● y = ax + b ● a and b are fixed numbers called constants ● y and x are variables ● When a is zero, y=b, therefore, b is the y intercept