Microecon Phase 1

What is the definition of economics?

The study of how individuals, firms, and societies make choices under scarcity, and how incentives shape those choices.

Difference between microeconomics and macroeconomics?

Micro → households, firms, markets (individual units). Macroe → economy-wide aggregates (GDP, inflation, unemployment).

What are the four factors of production and what income do they earn?

Land → rent; Labor → wages; Capital → interest; Entrepreneurship → profit

What is opportunity cost?

The value of the next best alternative that is given up when making a choice.

What does it mean to make a rational choice?

Compare marginal benefit (MB) with marginal cost (MC) → choose the option with the greatest net benefit.

What does it mean to make a choice at the margin?

Deciding whether to increase or decrease an activity by a small amount, based on comparing marginal benefit vs marginal cost.

What does the Production Possibilities Frontier (PPF) show?

The maximum possible combinations of two goods/services an economy can produce given resources and technology.

What do points ON, INSIDE, and OUTSIDE the PPF represent?

On = efficient; Inside = inefficient/unemployment; Outside = unattainable with current resources

Why is the PPF bowed outward?

Law of increasing opportunity cost: resources are not equally good at producing all goods, so producing more of one good forces giving up increasingly more of the other.

What is production efficiency?

Producing on the PPF (cannot produce more of one good without producing less of another).

What is allocative efficiency?

Producing the combination of goods where marginal benefit = marginal cost (the "best" mix for society).

What is absolute advantage?

The ability to produce more of a good with fewer resources than another producer.

What is comparative advantage?

The ability to produce a good at a lower opportunity cost than another producer.

Rule for trade: absolute vs comparative advantage?

Trade is based on comparative advantage, not absolute advantage.

What causes economic growth (outward shift of PPF)?

Capital accumulation (machines, human capital) and technological change (new methods, innovation).

What is the opportunity cost of economic growth?

Less current consumption today in exchange for more production possibilities in the future.

What are the key parts of the circular flow model?

Households (supply resources, demand goods); Firms (demand resources, supply goods); Markets (coordinate through prices); Money flows opposite to goods/resources