Econ Final

Microeconomics

The study of the behavior of individual households and firms, and their interactions in specific markets

Macroeconomics

The study of the aggregate (or overall) behavior of an economy. (things like unemployment, economy, and inflation indicate this)

Why use models in econ?

Simplifies the depiction of reality

Understand the circular flow diagram

Good vs Factor Market

• Goods market = buying stuff

• Factor market = buying the inputs to make that stuff

What is a positive claim/question?

asks how the world functions. Can be answered by examining facts. (tells a fact like “two million jobs were added last year”)

what is a normative claim/question?

asks what the world ought to be. Answer depends on value judgments too (what a thing should be “too few jobs were added last year”)

Opportunity cose

What must be given up to obtain some good. Always compared to the next best, mutually exclusive alternative. Don’t include sunk costs.

How to calculate opportunity cost?

Cost A + Benefit B - Cost B

Then see if opportunity cost > cost A

Next best can be found by calculating net benefit (benefit - cost for each)

Production Possibilites Frontier (PPF)

A graph showing the combinations of two goods that can be produced, given available resources and technology.

In a PPF what is the slope of the line?

Opportunity cost: calculate slope by: Cost of other things divided by cost of current thing its asking for (i.e. opportunity cost of pruning one tree = cost of hedging/cost of pruning)

What is absolute advantage?

The ability to produce a good using fewer inputs than another producer

What is comparative advantage?

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

A person should specialize in his are of _____ advantage to be efficient

comparative

If you want to determine comparative advantage, calculate ____

opportunity cost