unit 1: basic economic concepts

microeconomics

define trade-offs

refers to all alternatives that must be given up when one is chosen over the other (deal w/ choice; e.g. you buy a book instead of buying a movie ticket, you give up watching a movie)

define opportunity costs

refers to the next best thing (price of making trade-off; e.g. you buy a book instead of a movie ticket, the cost is the enjoyment and experience)

what is the connection btwn trade-offs and opportunity costs?

every time a trade-off is made, an opportunity cost exists

what is scarcity?

shortage; unlimited wants, limited resources

define the term marginal

refers to one more

define the term marginal cost

the cost of one more of something

what is allocative efficiency?

making as much as the size of a given price (equilibrium—aligning production with preferences)

what is productive efficiency?

refers to producing the maximum possible output at the lowest cost/using least amount of resources (think businesses)

what are economics that are based on facts called?

positive economics

what are economics that are based on opinions called?

normative economics

what does utility refer to?

the enjoyment we get from things

how is productivity determined?

number of outputs per unit of input (more productivity is when you don’t change anything but get more out of it)

how is revenue determined? how is profit determined?

revenue= (# of items)(price); profit= (revenue)-(cost)

price vs cost?

the term price is for consumers (how much consumers would pay); the term cost is for producers (how much it will cost to make)

what are the two types of capital?

human and physical

what does human capital refer to?

individual development: what is learned, experienced

what does physical capital refer to?

something that can be bought with money (e.g. truck)

define constant opportunity cost

resources are easily adaptable for producing either good (in microecon: linear, uncommon)

what are consumer goods? what are capital goods?

consumer goods are created for direct consumption while capital goods are created for indirect consumption (own a truck b/c you want vs need (for work))

what is law of increasing opportunity cost?

as you produce more of any good, the opportunity cost will increase because resources are not easily adaptable to producing both goods (convex PPC— bowed out)

what are 5 key economic assumptions?

1. society has unlimited wants and limited resources

2. due to scarcity choices must be made, and every choice has a cost.

3. everyone’s goal is to make choices that maximize their satisfaction

4. everyone makes decision by comparing the marginal costs and marginal benefits of every choice

5. real life situations can be explained and analyzed through simplified models and graphs

what are the 4 factors of production?

1. land (all natural resources used to produce goods and services)

2. labor

3. capital (human and physical

4. entrepreneurship (leader)

what is the importance of productivity?

improving productivity allows us to produce more stuff w/ fewer resources

what are the 3 subjects to the 3 economic questions?

what, how, who

what are the three economic systems?

command economy (communism), free market economy (capitalism), mixed economy (overall system)

what is command economy? What are its pros and cons?

command economy is when the government owns all the resources and answers the three economic questions. pros: low unemployment, job security, less income inequality, free health care. cons: no incentive to work harder or come up with good ideas, which keeps quality of goods poor, planners have a hard time predicting preferences, few individual freedom

why did communism fail?

shortage of goods that consumers want, and high prices but low quality

what is a free market? what are its characteristics?

individuals own resources and answer the economic questions. there are opportunities to make profit, incentives to produce quality items efficiently, wide variety of goods available, and competition and self interest work together to regulate economy

why does capitalism succeed?

most efficient production of goods that consumers want— goods produced at the lowest prices and the highest quality

what is the concept of the invisible hand?

concept that society’s goals will be met as individuals seek their own self-interest

what is a production possibilities curve?

a model that shows alternative ways that an economy can use its scarce resources (graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency)

what are the 4 assumptions of a production possibilities curve?

1. only two goods can be produced

2. there is a full employment of resources

3. resources are fixed (4 factors)

4. technology is fixed

what are 3 shifters of a PPC?

1. change in resource quantity or quality

2. change in technology

3. change in trade (increases consumption)

if a change results in a point inside the PPC what does it mean?

it means there is an inefficient use of resources (e.g. unemployed workers)

if a change results in an inward shift, what does it mean?

it means there is a loss of resources (e.g. plague killing workers)

what would happen if we limit trade?

it would reduce people’s choices and make them worse off

per unit opportunity cost =

opportunity cost/units gained (how much opportunity cost for one unit gained?)

it costs $10/unit of shirt. 5 shirts could have made 10 hats. What is the per unit opportunity cost of 1 shirt?

10 hats/5 shirts = 2 hats/1 shirt; per unit opportunity cost of 1 shirt is 2 hats

how do you determine which producer has the absolute advantage?

the producer than can produce the most output or requires the least amount of inputs has absolute advantage

how do you determine which producer has the comparative advantage?

the producer with the lowest opportunity cost has the comparative advantage

should countries trade based on absolute advantage or comparative advantage?

they should trade based on comparative advantage

what amount should USA and Brazil trade between and what should each trade?

1 and 2 (follow output = other goes over); USA should trade wheat and Brazil should trade sugar

what is explicit cost?

the costs involving monetary payment (e.g. a shirt is $6, the explicit cost of $6)

what is implicit cost?

the (non-monetary) cost of making a decision—what else could you have done with that money? (opportunity cost encompasses both explicit and implicit costs)

marginal cost and marginal benefit: if the line shifts towards the right, what does it mean?

it means marginal cost is greater than marginal benefit

define diminishing marginal utility

with every more unit/purchase, enjoyment decreases

what does marginal analysis prove?

people will continue to do something as long as the marginal benefit is greater than the marginal cost