Econ - Chapter 1

Scarcity?

Scarcity exists because resources such as money, time, and energy are limited while human wants are unlimited.

Why scarcity forces choice?

Because not all wants can be satisfied at the same time, choosing one option means giving up another.

Economics?

The study of how individuals, businesses, and governments make the best possible choices given scarcity and how those choices interact in markets.

Example of scarcity

A student choosing between studying and sleeping because time and energy are limited.

Opportunity cost?

The value of the best alternative given up when making a choice.

Why opportunity cost is the true cost?

It includes what you sacrifice, not just the money you spend.

Why opportunity cost matters more than money cost?

Many important costs are non-monetary, such as time, effort, or future opportunities.

Condition for a smart choice?

The value of what you gain must be greater than the value of what you give up.

Effect of changing costs and benefits?

Smart choices change when costs, benefits, or incentives change.

Incentives?

Rewards or penalties that influence people’s decisions.

Positive incentive?

A reward that encourages a behavior.

Negative incentive?

A penalty that discourages a behavior.

Gains from voluntary trade?

Each person values what they receive more than what they give up.

Absolute advantage?

The ability to produce a good or service at a lower absolute (money) cost than another producer.

Comparative advantage?

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

Advantage that determines gains from trade?

Comparative advantage.

Trade with absolute advantage in everything?

Trade can still be beneficial due to differences in comparative advantage.

Production Possibilities Frontier (PPF)?

A graph showing the maximum combinations of goods or services that can be produced with existing resources.

Point inside the PPF?

Inefficient use of resources or unemployment.

Point on the PPF?

Efficient use of all available resources.

Point outside the PPF?

An unattainable combination with current resources.

Effect of specialization?

Specialization and trade allow consumption beyond the PPF.

How to identify comparative advantage?

Compare opportunity costs; the lower opportunity cost indicates comparative advantage.

Who should specialize?

The person or country with the lower opportunity cost.

Economic model?

A simplified representation of reality that focuses on essential economic behavior.

Circular-flow model?

Shows how households, businesses, and governments interact in input and output markets.

Input markets?

Households sell labor and resources; businesses buy them.

Output markets?

Businesses sell goods and services; households buy them.

Microeconomics?

The study of individual choices by households, businesses, and governments and how they interact in markets.

Macroeconomics?

The study of the overall performance of the national and global economy.

Trees vs forest analogy?

Microeconomics focuses on individual parts; macroeconomics focuses on the whole economy.