micro unit 1: basic economic concepts

Trade-off

occurs when you give up one thing to get something else

Choice

Given scarcity, individuals make decisions about what to do—which necessarily involves decisions about what not to do.

Scarcity

The idea that we have unlimited wants and needs, but limited resources

Explicit cost

out-of-pocket costs (payment which is actually made)

Implicit cost

unseen; the opportunities cost of using resources the firm already owns

3 fundamental economic questions

What to produce?

How to produce?

For whom to produce?

Market economy

The decisions of individual producers and consumers largely determine the what, how, for whom to produce, with little government involvement in the decisions.

Capitalism and American Free Enterprise are examples of economics that are close to a pure market system

Command economy

Industry is publicly owned and a central authority (government) makes production and consumption decisions.

Mixed economy

Combining market and command economies (U.S.)

Traditional economy

What, how, for whom answered by cultural customs

Marginal analysis

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less

Marginal benefit

the gain from doing something more than one time (additional)

Marginal cost

the cost of doing something one more time

when is a rational choice made

when MB >= MC

Incentives

rewards or punishments that motivate particular choices

Explaining how incentives influence consumer and producer behavior?

because of incentives, producers are free to charge higher prices when there is a shortage of something, and to keep the resulting profits.

• they also provide producers to make more of the needed goods while also eliminating shortage

Specialization

each person specializing in the task that they are good at performing.

• increases mass production

Comparative advantage

if the OC of producing the good or service is lower for that individual than for other people

Absolute advantage

if he or she can make more of it with a given amount of time and resources

absolute DOESNT EQUAL comparative

ex. jack makes 2 pizzas per sec, anansha makes 3 pizzas per sec, anansha has absolute advantage

Explaining why and how specialization and trade based on comparative advantage can create mutual gains for all trading parties.

Beneficial because both nations will be able to save time and resources, while also being able to increase the overall output in their respective nations.

Points ON a PPC

Feasible and productively efficient

Points TO THE LEFT a PPC

Feasible, but inefficient

Points TO THE RIGHT a PPC

Not feasible

Straight-line PPC

Constant opportunity cost

Bowed-out PPC

Increasing opportunity cost

Bowed-in PPC

Decreasing opportunity cost

Shift outward

(economic growth)
Due to increased availability of resources (or factors of production) and improvements in technology.

Shift inward

(economic contraction)
Due to decreases availability of resources (or factors of production) and no improvements in technology.

OC INPUT FORMULA

1A = A/B

OC OUTPUT FORMULA

1A = B/A