ECON 101 - MODULE 1

microeconomics

the branch of economics that studies the economy at the small-scale level, examining individual consumers and specific markets

macroeconomics

the branch of economics that studies the economy at the large-scale level, examining total output, price label, and other aggregate measures of the economy.

• examines the entire economy of a state, country, or the world

resources

the inputs used to produce goods and services, also known as factors of production

4 categories of resources

land, labor, capital, entrepreneurial activity

land

natural resources

labor

physical and mental activity devoted to producing goods and services

capital

tools, machinery, infrastructure, and knowledge used to produce goods and services.

physical capital

tangible items that are created to increase productivity

human capital

the knowledge and skills that people acquire in order to increase productivity

entrepreneurial ability

the talent or ability to combine land, labor, and capital to produce goods and services.

• involves assuming risk and organizing resources into a productive process

scarcity

unlimited wants cannot be completely satisfied with limited resources

relative scarcity

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

allocation

process of assigning a good, service, or resource to one use instead of another

opportunity cost

the value of the next best forgone alternative

• value of the opportunity that you gave up when you chose one activity or opportunity instead of the other

self-interest

idea that people choose to do things that interest them

marginal benefit (MB)

the additional benefit associated with one more unit of an activity

Marginal Benefit (MB) = change in total benefit / change in quantity

marginal cost (MC)

the additional cost associated with one more unit of an activity

Marginal Cost (MC) = change in total cost / change in quantity

marginal decision making

the process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal cost of an action

optimization

idea that people make choices in order to maximize the overall benefit or utility of an action subject to its cost

• If MB ≥ MC = DO IT!

• If MB < MC = DON’T DO IT!

decreasing marginal benefit

negative relationship between the marginal benefit associated with the use of a good or service and the quantity consumed

• the GREATER the good or service that is consumed, the LOWER the marginal benefit

increasing marginal cost

the additional cost associated with each successive unit of an activity increases

optimal level of output

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

• MB = MC

production possibilities schedule

TABLE that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology

production possibilities frontier

GRAPH that shows the possible combinations of different goods or services that can be produced with fixed resources and technology

combinations of production that fall on the PPF are…

possible and efficient

combinations in the interior (to the left) of the PPF are…

possible but inefficient

combinations in the exterior (to the right) of the PPF are …

impossible

comparative advantage

the ability to produce a good or service at a lower relative opportunity cost than another producer

specialization

using available resources to produce a single good or service rather than multiple goods or services

terms of trade

price of one good, service, or resource in terms of another (between opportunity cost of buyer and seller)

• SELLER’S opportunity cost < PRICE < BUYER’S opportunity cost

gains from trade