economics - unit 1: 7 principles of economics + PPF graph + absolute & comparative advantage

scarcity forces tradeoffs

• reminds us that limited resources force people to make choices & face trade-offs when they choose

• never be enough of everything to satisfy everyone completely

costs v. benefits

• tells us that people choose something when the benefits of doing so are greater than the costs

thinking at the margin

tells us that most of the decisions we make each day involve thinking in terms of little more or little less, rather than all or nothing

marginal cost

what can give up to add 1 unit to an activity

marginal benefit

what you gain by adding 1 more unit

incentives matter

• costs & benefits influence our behavior

• something that motivates ppl to take particular course of action

trade makes ppl better off

by focusing on what we do well & then trading w/ others, we will end up w/ more & better choices than by trying to do everything for ourselves

markets coordinate trade

• markets usually do better than anyone or anything else at coordinating exchanges between buyers & sellers

• not just stock market, supermarket, or farmers market, but any arrangement that brings buyers & sellers to do business w/ each other

future consequences count

• decisions made today have consequences not only for today but also in the future

OR

• often, when someone makes economic decisions, they dont consider all future consequences

opportunity cost

• what you must forgo/lose in order to get something

• when ppl make decisions, they narrow alternatives to 2, choose 1

Production Possibilities Frontier (PPF)

• economic model graph that shows how an economy might use its resources to produce 2 goods

• curved → bc all resources arent equal

absolute advantage

• ability of individual/group to carry out particular economic activity more efficiently than another individual/group

• country w/ absolute advantage does it faster/better

comparative advantage

• ability of individual/group to carry out particular economic activity at lower opportunity cost than another individual/group

• country w/ comparative advantage gives up less