Summary Notes

Economics 230

Part I

Chapter I

• Economics is concerned with the implications of relative scarcity

• A consequence is that there is no free lunch

• Rational decision makers compare benefits and costs of choices. How?

• Benefit-Cost Principle: Take an action if the added benefits exceed the added costs

Applying The Benefit-Cost Principle

• Reservation prices

• Economic surplus

• Opportunity cost

• Using graphics

• Checking on rationality

• Pitfalls in Making Decisions:

• #1 Ignoring Opportunity Costs

• #2 Failing to Ignore Sunk Costs

• #3 Failing to Understand the

Average-Marginal Distinction

Chapter II• Comparative advantage is an application of

opportunity cost• Specialization and division of labor can

increase the total output of the community• Principle of Increasing Opportunity Cost• Comparative advantage determines the

pattern of trade• Production Possibilities Frontier Model• Benefits of Trade

Chapter III• Specialization and division of labor requires

that people trade with each other. Model of single market describes the process.

• Demand reflects intentions of buyers

• Supply reflects intentions of sellers

• Equilibrium price is one where buyers and sellers intentions are in balance

• Study effects of shifts in supply and demand

Chapter 7

• The efficiency of a perfectly competitive market system

• Maximizing the economic surplus

• Cost of price ceilings and price floors

• The effect of taxes and subsidies on a competitive economy

Chapter 9

• Using comparative advantage to understand trade patterns between regions and countries

• Analyzing international trade in a good using supply and demand

• Impact of trade restrictions