Economics Unit 1

Economics

Studies how scarce/limited resources satisfy unlimited wants

Scarcity

Forces choices and tradeoffs between consumption options;

Resources are limited compared to unlimited wants

Tradeoff

Giving up one thing for something else

Value Judgment

The relative importance one assigns to an action or alternative

Opportunity Cost

What was given up to make a purchase or carry out a decision; The cost of a purchase or decision measured in terms of a forgone alternative

Efficiency

Producing a given good or service at the lowest possible cost; getting the most output from resources

Equity

Justice or fairness in the distribution of goods and services

Resources (Factors of Production)

Used to create goods/services

Labor (Factor of Production)

Human effort (income: wages)

Land (Factor of Production)

Inputs from nature (income: rent)

Capital (Factor of Production)

Produced goods used to make other goods (income: interest)

Entrepreneurship (Factor of Production)

Organizing activity and risk-bearing (income: profit)

Economic Theory

A formal explanation of the relationship between economic variables

Model

Provides framework for theory, including:

• Two variables to explore

• Assumptions

• Data collection/analysis

• Conclusions about variable relationships

Assumptions

Conditions held to be true within a model

Econometrics

The use of statistical techniques to describe the relationships between economic variables

Economic Policy

Action taken to change economic conditions;

Policies influenced by decision-makers’ value judgments

Graph

An illustration showing the relationship between two variables that are measured on the vertical and horizontal axes.

Direct Relationship

Variables move in same direction (upward slope)

Inverse Relationship

Variables move in opposite directions (downward slope)

Production Possibilities Curve

Gives the various amounts of two goods that an economy can produce with full employment and fixed resources and technology (shows tradeoffs)

Points of the Curve (Production Possibilities Curve)

Efficient production combinations

Points Inside Curve (Production Possibilities Curve)

Unemployment

Points Outside Curve (Production Possibilities Curve)

Currently unattainable/impossible

Movement Along Curve (Production Possibilities Curve)

Shows opportunity cost

Rightward Shift (Production Possibilities Curve)

Economic growth

Unemployment

Resources available for production are not being used

Economic Growth

An increase in an economy's full employment level of output over time

Capital Goods

Goods, such as machinery and equipment, that are used to produce other goods and services

Consumer Goods

Goods, such as food and household furniture, that are produced for final buyers

Macroeconomics

The study of the operation of the economy as a whole

Microeconomics

The study of individual decision-making units and markets within the economy

Cost-Benefit Analysis

Weighing the costs and benefits of an action in order to maximize the net benefit from the action

Utility

Satisfaction received from consuming goods/services

*Opportunity Cost

Value of best alternative forgone

Marginal Benefit (Marginal Utility)

Change in total satisfaction from one more unit

Total Benefit (Total Utility)

Total satisfaction from consuming a specific amount

Law of Diminishing Marginal Utility

Additional units eventually add less to total utility/satisfaction

Marginal Cost

The change in total cost from each additional unit of a good, service, or activity produced

Total Cost

The cost of producing a specified number of units of a good, service, or activity

Net Benefit =

Total Benefit - Total Cost

(Goal is to maximize)

Net Benefit Maximizing Rules

1. Maximize where total benefit exceeds total cost by greatest amount

2. Maximize where marginal benefit equals marginal cost

Explicit Costs

Payments that a business makes to acquire factors of production, such as labor, raw materials, and machinery

Implicit Costs

The opportunity costs to business owners from using their resources in the business rather than in an alternative opportunity

Normal Profit

Profit necessary to recover implicit costs and keep a business in operation; considered to be an economic cost of production

Economic Cost of Production =

Explicit Costs + Implicit Costs

Economic Profit (Excess Profit)

Profit beyond normal profit

Marginal Revenue

Change in total revenue from selling one more unit

Total Revenue =

Price x Quantity sold

Profit Maximization Rules

1. Maximize where total revenue exceeds total cost by greatest amount

2. Maximize where marginal revenue equals marginal cost

Profit or Loss =

Total Revenue - Total Cost

Externality

The effect of an action on a person or thing that was not one of the parties involved in the action

Positive Externality

Benefits to others (e.g., education)

Negative Externality

Cost imposed on others (e.g., pollution)

Social Benefits =

Private Benefits + Positive Externalities

Social Costs =

Private Costs + Negative Externalities

Net Social Benefit =

Social Benefits - Social Costs

Social Net Benefit Maximization Rule

Where marginal social benefit equals marginal social cost

Public Choice

Study of economic motives in collective decision-making

Rational Ignorance

When cost of acquiring information exceeds benefit

Special Interest Groups

Persons sharing/promoting a common position