Micro Unit 1: Basic Economic Concepts

Economics

The study of scarcity and choice

examining how people allocate limited resources

Scarce

products desired in quantities beyond available supply

Examples of NOT scare things_____________

Examples of SCARE things_________________

NOT Scare:

- Air, although pollution and airborne diseases have limited availability of clean air

SCARE:

- Art museums to zippers (anything limited in supply)

Trade-off

give one thing up to have something else

Why: resources are scarce

People face trade-offs because...

- Limited income

- Limited time

The economy's resources include (or are known as factors of production)

CELL

- Land: resources that come from nature (plants, water, and minerals)

- Labor: the effort of workers

- Capital: manufactured goods to make other goods/services (machinery, buildings, and tools)

- Entrepreneurship: risk-taking, innovation, organization of resources for production

Marginal Decisions

Comparing the cost and benefits of doing something more of an activity versus a little less

trade-off margin

Marginal Benefit

The gain of doing something one more time

Marginal Cost

The cost of doing something one more time

Marginal Analysis + significance

The study of margin decisions

Significance: helps determine "how much" to do of an activity based on the comparison of marginal benefit and cost

Opportunity Cost

The value of the next best alternative that you give up in order to get the item

Microeconomics, households, and firms

Micro: focus on how decisions are made + consequences Households: a person or group of people who share an income

Firm: Any organization that produces good/service for sale

Macroeconomics

The overall changes in the economy

Economic Aggregates

Economic measures such as unemployment rate, inflation rate, and GDP

Normative and Positive Economics

Positive: answers questions on how the economy works with right or wrong answers

-scientific statement about what has happened in the economy

Normative: involves saying how the economy should work

-opinion or judgment based

Economics is a "guide to policy" because...

They are predictions, not prescriptions

They attempt to tell you what will happen if a policy is changed, but don't tell you the result

Traditional Economy

Production and consumption decisions are based on precedent

-Amish communities

Market Economy (capitalist and free enterprise)

distributed decisions made by individual/firm --> production and consumption

-Capitalist: factors of production = privately owned

-Free Enterprise: minimal government oversight

overall no gov intervention to all for the freedom of what, how, and who for production

Command Economy

government/central authorities --> production and consumption decisions

-sets prices for goods

-owning means of production

-communism/socialism

overall lack of goods --> less production --> failure

Mixed Economy

Combines elements of traditional, market, and command economies

-Traditional: work schedules, production decisions, and purchases

- Market: publicly owned schools, police, and fire departments

-Command: some level of private control of businesses

incentive = success for mixed economies

Incentives + connection

Incentives: specific choices motivated by rewards or punishments

Connection: market economies face incentive through prices and profit

-command economies lack incentive --> failure

Property rights + connection to incentives

Established ownership and grants individuals the right to trade goods/services with each other

Connection: right to own property --> produce things of value --> put resources to best use

Graphs + significance

simplified representation of a situation that helps to understand and predict economic behavior

Significance: help economists simplify/focus on the influence of only one change at a time, while they hold everything else constant

Ceteris Paribus

other things equal assumption

shorthand indication of the effect one economic variable has on another,

all other relevant factors remain unchanged

Production Possibilities Curve and significant

demonstrates the necessary trade-offs in an economy that only produces two goods

-shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced

-Points within the curve: feasible but not efficient

-Points on the curve: feasible and productively efficient

-Points outside the curve: not feasible

Efficiency

there are no missed opportunities or resources

idea that you could not make anyone better off without making someone worse off

-resources are being allocated and put to use in the best possible way

Inefficient

idea that you can make someone better off without making anyone worse off

-resources are not being being used to their full potential

Productive Efficiency

Producing ON the projected production possibilities curve

Allocative Efficiency

Producing ON the PPC that is preferred by consumers

To be an efficient economy, the economy must_______

produce the maximum amount of goods with some being the most wanted by consumers

Constant OC

straight line

trade-off between two goods remains constant

occur when resources to make one good are perfectly adaptable to make another good

PPC with decreasing opportunity cost look like a

concave shape

bowed in

Increasing OC

concave shaped (bowed-out)

as you produce more of one good or service, its opportunity cost will increase more with each good produced

-must forgo the opportunity to make another good

occurs when different resources are not equally suitable for producing different goods

In the real world, PCC's with increasing opportunity cost are more common b/c____

resources are not perfectly adaptable to all kinds of production

-seen with the PPC being a curved line

When all resources can be used for the production of either good____

The PPC is a straight, downward-sloping line

-opportunity cost is constant

Economic Growth and Graph

Graph: an expansion of the economy's production possibilities

-PPC shifting outward

increase in the maximum amount of goods and services the economy can produce

-driven by the increase of resources, increase in capital and technological innovations

Economic Systems

organize how a society produces and consumes goods

answer: goods and services will be produced, how will the goods and services be produced and who will consume these goods and services produced

Sources of Economic Growth

1. availability increase of resources used to produce goods/services

2.improved technology for the production of goods/services

An economy can shrink when______

the production possibilities have lowered after a loss of resources

Graphically: inward shift of the PPC

Trade

the exchange of goods/services

Trade _____ people's standard of living bc ________________

raises, life is easier + more efficient

Specialization

dividing tasks to enhance trading

Adam Smith

Author of The Wealthy Nations

discipline = core of economic gain

When everyone specializes in a task and trades_____

the economy can overall produce more

OC Equation

the OTHER thing you are giving up = numerator

thing you are FINDING = denominator

Comparative Advantage

the ability of an individual to produce good/service at a lower OC than another individual

-specialization when having comparative advantage = trade

Absolute Advantage

producing a good/service if an individual can make more in a given time/resources

-finds the most efficient producer --> specialization and trade

Mutually Beneficial Terms of Trade

when two parties exchange goods at a better rate than they would be able to produce themselves

-The seller of the good determines the MINIMUM price in the range

-The buyer of the good determines the MAXIMUM price in the range

Mutually beneficial terms of trade

find the rate of exchange between 2 goods that are a gain for both producers, based on their OC

Terms of Trade: Two Important Lessons

1. gains of trade through specialization, both are then able to consume more of booth goods

2. both produces have a comparative advantage and comparative disadvantage, therefore trade is beneficial

Comparative Advantage and International Trade: Is international trade cause for concern or celebration?

Opinions:

- Nations should produce goods for themselves rather than buying them from other countries

-Industries around the world demand protection from foreign competition

Economists' View on International Trade:

- View is as comparative advantage, if America produces pork and Canada produces aircraft, they both consume more if trading than being self-sufficient

3 questions on how to allocate resources

1. what goods and services will be produced?

2. how will those goods and services be produced

3. who will receive the goods and services

Term of Trade

1/4-2

amount between two opportunity costs

Cost-Benefit Analysis

measure + comparison of costs + benefits of individual decisions

comparing the costs with the benefits to make an informed decision

if the total benefit exceeds the total cost then activity should proceed

-answer the question of "Should I do this?"

Rational Consumers

consumer/producer who behave rationally and make optimal decision

rational choices that maximize their utility with their given budget

-use cost-benefit analysis --> get the most utility with the given amount of money they have

Consumer Choice Theory

4 principles:

-Consumers are rational

-Consumers will act in their best interest

-Consumers are constrained by budgets and prices

-Consumer choices are based on the above

apply to consumers with limited resources

used to maximize utility from resources/income

-using marginal utility consumers can see how much utility each good/service will give them, and make decisions accordingly

Consumer Goods vs. Capital Goods

CG: goods used by consumers to satisfy their immediate wants/needs

-food, clothes, water

-typically purchased by individuals and households

CG: goods that are used to in the production process of other goods and services

-lumber, plastic, machines

-purchased by producers/busineses

Consumption Possibilities

ways two or more goods can be consumed by a consumer based on the income

CPC: shift is either in an increase/decrease in income or a change in the price of the goods

budget lines = consumption possibilities

CPC

points inside = affordable but dont use all of the income

points outside = unaffordale with the consumers income

-points on the line = affordable and use all of the income

Explicit Costs

expenses paid explicitly, most commonly with money or capital

-out-of-pocket costs that commonly include the monetary price of wages, rent, utilities, and advertisements

Implicit Costs

costs that don't involve monetary exchange, and are not typically thought of when one says "cost".

-almost all implicit costs are opportunity costs: both are related to losing the next best alternative in some way

can be things like opportunities or time

Inputs and Outputs

Inputs: factors of production or resources used to produce goods/services (such as land, capital, labor, and entrepreneurship)

Outputs: goods/services resulting from the production process

Law of Diminishing Marginal Utility

as you buy more of a good, its marginal utility will decrease

-some items = you will need to purchase more for them to be useful

but overall it holds true as you purchase more item

-helps find the optimal consumption bundle for how many goods someone should buy

Marginal

one more or one less of something

- connection to marginal decisions

Marginal Benefit/Marginal Utility

MB: quantity of benefit that an individual or a firm may receive from continuing an activity once more

-measured in dollars

MU: satisfaction or happiness an individual receives from one more unit of an activity, often associated with the enjoyment resulting from purchases

-measured in utils

Connection to Optimal Consumption Bundles: OCB exists when MUx/Px=MUy/Py, and this bundle is within budget

Economic Models

simplified version of reality that uses two variables to help us better comprehend and predict economic behavior

features PPC

Net Benefit

NB: difference between the total benefit and the total cost for an individual or a firm

-revenue - total expenses = NB

relates to Cost Benefit Analysis: both examine the difference between revenue and cost, informing choices as to whether or not to follow through on an activity

Optimal Consumption Bundle

"bundle" of goods and services that a consumer chooses to maximize their total utility within their budget constraint

-consumer should continue to buy as long as the marginal utility you receive from that goods exceeds the price

Property Rights

exclusive rights of a person to use, control, or transfer an asset

-importance: efficiency and development

create incentives for people to invest and trade property --> to a higher lifestyle

Resource Allocation

process of assigning rare resources to meet the unlimited wants in society

Revenue

total amount of money that a firm receives from selling its goods or services

Sunk Costs

cost that you have already paid and cannot a refund on

connection to consumer choice theory: when a consumer chooses to act in their best interest in purchasing something, the sunk cost should have no bearing on their decision

Total Benefits

sum of the utility gained by consuming or producing a good/service

Total Costs

sum of all fixed and variable costs incurred when producing a certain quantity of an output

Utility and Utils

used to measure satisfaction/benefit/pleasure gained from consuming a particular good or service to understand the consumer's behavior

-want to maximize utility/utils

varies from person to person --> the perception of satisfaction gained is subjective