ECN112 - Choice In a World of Scarcity

What does every choice have?

A tradeoff and a cost

Budget Constraint

The set of all combinations of goods we can afford with our income

Assumption

The typical consumer has limited money to spend

Intuition

A steeper budget line (and larger slope in absolute value) means that the tradeoff is larger

Marginal Analysis

Examining the benefits and cost of choosing a little more or less of a good

Utility

• Another word for satisfaction or happiness

  • A measure of the amount of satisfaction or happiness you get from consuming a good

Law of Diminishing Marginal Utility

As a person receives more of a good, the additional (marginal) utility from each additional unit of good declines

Rational Choice

A rational customer only consumes additional units of a good if the marginal utility exceeds the opportunity cost

Tools

Provide insights about the economy

Examples of Tools

• Theory

• Statistical analysis

• History

Positive Economics

Beliefs about the way the world is or how it works

Normative Economics

Beliefs about the way the world should be

Normative debates

Debates over morals and values; central to our politics and society

Economic Output

Total value of all goods and services produced in an economy

Good (product) Markets

Where goods and services are bought and sold

Factor Markets

Where factors of production are bought and sold

Real Flows

The flows of the factors of production that go from household to firms and goods and services that go from firms to households

Production Possibilities Frontiers (PPF)

A graphical boundary demonstrating what can be produced, given available factors of production

Law of Increasing Opportunity Cost

As you produce additional units of a good or service, each unit gets more expensive to produce

Product Efficiency

Given available inputs and technology, it is impossible to produce more of one good without lowering production of the other

Allocative Efficiency

The particular point of productive efficiency that is most desirable for society

Economic Growth

An increase in the total output of an economy

How do we achieve economic growth as a country?

• Discovering and adding new resources

• Inventing new technologies

• Investing in physical capital (building, machines)

• Investing in human capital (skills, knowledge)

Trade

We all specialize in certain skills and trade with others for skills we lack

Creative Destruction

New ways of working lead to economic growth, but old ways of working fade off