Economics Unit 1

Economics textbook definition

the study of scarcity or the study of unlimited wants and limited resource

a better definition: a methodology for analyzing how firms and people behave under different incentives and constraints

scarcity

economic agents have limited resources

scare good

something must be given up to obtain it

opportunity cost

highest value forgone alternative

the single best value or benefit you give up when you choose one option over all other available choices

(used when determining comparative advantage) it is the information necessary for individuals, firms, and economies to determine whether to produce a good or buy it somewhere else

positive statements

have to do with what is, fact based, objective claims that can be proven true or false with data

ex. An increase in the minimum wage leads to higher unemployment among low-skilled workers

normative statements

have to do with what should be, opinion based, Subjective claims reflecting moral, ethical, or political value judgments that cannot be tested by data alone.

ex. The government should increase the minimum wage to help low-income families

properties of economic models

simple, general, useful in predicting, can be tested

productions possibility frontier

shows the max amount of one good that can be produced given any rate of production of another good

ex. a model economy that produces two goods: a consumption good and a durable good

absolute advantage

the ability to produce more of a particular good, the ability to do something better than the other

comparative advantage

the low opportunity cost producer

the fundamental principle that determines trade patters among individuals, firms, and economies

based on opportunity cost, which is the real cost in producing a good or engaging in an activity

the PPF becomes bowed when:

we add more individuals and activities to our model, allow for specialization in what individuals have a comparative advantage in producing, and allow for trade

demand and supply assumptions of the basic model set up

market is competitive

many buyers and sellers

homogeneous good

law of demand

other things equal, the higher the price of a good the lower the quantity demanded

demand curves slope _____

demand curve

graphical relationship between price and quantity demanded

market demand

the sum of all individual demands for a good or service