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.

Inputs

Productive resources used to produce goods and services such as labor, capital and natural resources.

Positive statements

Objective claims that can be tested and validated, focusing on what is.

Normative statements

Subjective claims that reflect opinions or judgments about what ought to be.