micro unit 1

Economics is the science of

scarcity

Scarcity

means that we have unlimited wants but limited resources.

Economics is the study of

choices

Economics

Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants.

Microeconomics

Study of small economic units such as individuals, firms, and industries

Macroeconomics

Study of the large economy as a whole or economic aggregates

theoretical economics

Economists use the scientific method to make generalizations and abstractions to develop theories

policy economics

Theories are then applied to fix problems or meet economic goals

Positive Statements

Based on facts. Avoids value judgments

Normative Statements

Includes value judgments

5 Key Economic Assumptions

1) Society's wants are unlimited, but ALL resources are limited (scarcity).

2) Due to scarcity, choices must be made. Every choice has a cost (trade-offs, "opportunity cost").

3) Everyone's goal is to make choices that maximize their satisfaction. Everyone acts in their own "self-interest."

4) Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.

5) Real-life situations can be explained and analyzed through simplified models and graphs.

Marginal Analysis

making decisions based on the additional benefit vs. the additional cost

Trade-offs

all the alternatives that we give up whenever we choose one course of action over others.

opportunity cost

The most desirable alternative given up as a result of a decision

Utility

Satisfaction

Marginal

Additional

Allocate

Distribute

Scarcity occurs at

all times for all goods

Shortages occur when

producers will not or cannot offer goods or services at current prices. Shortages are temporary.

Price

Amount the buyer (or "consumer") pays

Cost

Amount the seller pays to produce a good

Investment

the money spent by BUSINESSES to improve their production (not stocks & bonds)

Goods

physical objects that satisfy needs and wants

Consumer Goods

created for direct consumption

Capital Goods

created for indirect consumption

Services

actions or activities that one person performs for another

Accountants look only at

explicit costs

Explicit costs

are the traditional "out-of-pocket costs" of decision making.

Economists look at

explicit costs and implicit costs

Implicit costs

Are the opportunity costs such as forgone time and forgone income

The 4 factors of Production

land, labor, capital, entrepreneurship

Land

All natural resources that are used to produce goods and services. Anything that comes from "mother nature."

Labor

Any effort a person devotes to a task for which that person is paid

Physical Capital

Any human-made resource that is used to create other goods and services (tools, tractors, machinery, buildings, factories, etc.)

Human Capital

Any skills or knowledge gained by a worker through education and experience (college degrees, vocational training, etc.)

Entrepreneurship

ambitious leaders that combine the other factors of production to create goods and services.

Profit =

Revenue - Costs

What is the PPC?

A production possibilities Curve (PPC) is a model that shows alternative ways that an economy can use its scarce resources

4 Key assumptions of the PPC

1) Only two goods can be produced

2) Full employment of resources

3) Fixed Resources (Ceteris Paribus)

4) Fixed Technology

Constant Opportunity Cost

Resources are easily adaptable for producing either good.

Law of Increasing Opportunity Cost

As you produce more of any good, the opportunity cost (forgone production of another good) will increase.

marginal unit =

Opportunity Cost/Units Gained

Productive Efficiency

Products are being produced in the least costly way

Allocative Efficiency

The products being produced are the ones most desired by society

3 Shifters of the PPC

1) Change in resource quantity or quality

2) Change in Technology

3) Change in Trade

Assume people didn't trade. What things would you have to go without?

Everything you don't produce yourself!

What would life be like if cities couldn't trade with cities or states couldn't trade with states?

Limiting trade would reduce people's choices and make people worse off.

Absolute Advantage

The producer that can produce the most output OR requires the least amount of inputs

Comparative Advantage

The producer with the lowest opportunity cost.

Countries should trade if

they have a relatively lower opportunity cost.