Chapter 1

Microeconomics

• Examines how people, companies, and the government play a part in an economy.

• Marketing goods, prices, and production

• Small-scale

Macroeconomics

• Examines the overall production of a whole economy

• Average price, how price and production are related

• Large-scale

Resources

• Inputs used to produce goods and services

• Fallen into four categories

  • Land

  • Labor

  • Capital

  • Entrepreneurial Ability

Land

Natural resources used in production (farmland, forests, oil, oceans, fish, etc.)

Labor

All physical and mental activity devoted to produce goods and services (plant crops, run machines, teach economics)

Capital

• Tools, machinery, infrastructure, and knowledge used to produce goods and services

• NOT money

• Fallen into two categories:

  • Physical

  • Human

Physical

Items that are created to increase productivity (machinery, buildings, trucks, and tools)

Human

Knowledge, skills, and education people acquire to increase productivity

Entrepreneurial Ability

• Combining land, labor, and capital to produce goods and services

• Involves assuming risk and costs of failure

Scarcity

• A condition that results from the inability of limited resources to satisfy unlimited wants

• You cannot have everything you want without experiencing some cost

Money

How we allocate resources to save money

Time

Deciding to do this or that to build human capital

Relative Scarcity

• Comparison of the scarcity of one good, service, or resource to that of another

• Drinkable water compared to water in general

Allocation

• Assigning a good, service, or resource to one use instead of another

• Allocating public space for recreational use

Opportunity Cost

• The value of the next-best forgone alternative

• The opportunity that you gave up when you chose one activity or opportunity instead of another

• Exists because of scarcity

Marginal Benefit

The additional utility derived from doing something

Marginal Cost

The additional cost associated with expanding an economic activity

Decreasing (diminishing) Marginal Benefit

As you do more of something in a specific time period, you enjoy each successive unit less

Increasing Marginal Cost

As more of a good is produced in a given time period, the cost of producing each successive unit tends to rise

Optimal Level of Output

The marginal benefit of the last unit produced and consumed is equal to the marginal cost of that unit

Possible Production Frontier

Shows the production combinations that are attainable and efficient

Constant Opportunity Costs

The opportunity cost associated with increasing or decreasing the production of one good of service, in terms of another, is constant at every level of production

Efficient Allocation of Resources

It is possible to increase the production of one good only by decreasing the production of another

Inefficient Allocation of Resources

It is possible to increase the production of one good without decreasing the production of another (going to sleep instead of doing anything)

Circular Flow Model

Concisely describes how goods, services, resources, and money flow back and forth in an economy