Microecon Unit One: Econ Basics

Circular Flow Matrix

Households, Product Market, Businesses, and Factor/Resource Market

Factor Payments

Payments made by businesses. Rent

for land, wages for labor, interest for capital

Transfer Payments

Payments made by the government

to meet a specific goal rather than pay for goods and

services

Investment

Businesses spending on capital that increases productivity

Scarcity

Unlimited wants, limited resources

Consumer goods

goods made for direct consumption

Capital goods

goods made for indirect consumption/goods that make consumer goods

3 Basic Economic Questions

1. What should we produce?

2. How should we produce it?

3. For whom should we produce it?

Institutions

the official and unofficial conditions that shape the environment in which decisions are made

Centrally planned/command economies

Total government control of the economy

Free-market economy

Economic system where individual citizens own the resources and decides what to make, how to make it, and who gets it. Little or no government involvement in the economy

Incentives

factors that motivate a person to act or exert effort (can be positive, negative or indirect)

Trade-offs

a situational decision that involves sacrificing the benefits of one choice to obtain the benefits of another

Opportunity cost

the highest valued alternative that must be sacrificed to get something else

Marginal thinking

evaluating whether the benefit of one more units of something is greater than it’s cost

Trade creates value

Facilitating the voluntary exchange of goods and services, moving them from individuals who value them less to those who value them more.

Specialization

when an individual, firm, or country focuses on producing a specific, limited range of goods or services where they have a comparative advantage

Production Possibility Frontier/Curve

A graph that shows all the different combinations of output of two goods that can be produced using available resources and technology

Point on the PPC

Combination that is productively efficient

Slope of PPC

Indicated the opportunity cost of producing one or the other

Points inside the PPC

Not efficient

Points outside the PPC

not obtainable give the resources

PPC shifts

occur when their is an improvement/loss of resources or technology

Absolute advantage

can produce more of a good than someone else

Comparative advantage

can produce something at a lower opportunity cost

Determining comparative advantage (for output)

other goes over

Determining comparative advantage (for input)

other goes under

positive statement

can be tested and validated

normative statement

an opinion that cannot be tested

Ceteris paribus

all else equal

Endogenous factors

variables inside the model that we can control

Exogenous factors

variables outside the model beyond our control

Law of increasing opportunity cost

opportunity cost of production rises as society produces more

Utility

consumers measure of satisfaction

Optimal consumption rule

consumer must equalize the marginal utility/$ of each good while spending the whole budget

Rival goods

cannot be enjoyed by more than one person at a time

Non-rival goods

can be enjoyed by multiple people at once

Budget constraints

limits the cost of a consumer consumption bundle to no more than their income

Optimal consumption bundle

maximizes the consumers total utility given their budget constraint