Eco Chap 1

economic perspective

A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.

marginal benefits

the extra satisfaction or value you get from consuming or producing just one more unit of a good or service. It answers the question: “How much better off will I be if I have one more?”

marginal costs

an accounting method that looks at the extra cost of making just one more unit of a product

scarcity

economic resources needed to make goods/services are limited in supply

opportunity cost

amount of other products that must be forgone or sacrificed to produce a unit of a given product.

Example of opportunity cost

Facebook

How is Facebook an opportunity cost?

Facebook charges advertisers $100 billion a year in order to make its services free to users.

utility

the pleasure, happiness, or satisfaction obtained from consuming goods/services

Purposeful Behavior

people make decisions with some desired outcome in mind

Is rational self-interest the same as selfishness?

No/False

marginal analysis

The comparison of marginal (“extra” or “additional”) benefits and marginal costs, usually for decision making.

Example of marginal analysis

Should you be studying an extra hour for an exam?

scientific method

A procedure involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws.

What is a very well-tested and widely accepted theory?

Economic law or economic principle

economic principle

tested ideas that predict how people or economies act.

What is the primary purpose of economic theories, principles, and models?

To simplify complex economic realities and predict behaviors.

Other-thngs-equal assumpton (ceteris paribusI)

focusing on the relationship between two factors while keeping everything else constant. For example, studying Pepsi's price and sales without considering other influences.

What does the 'other-things-equal assumption' imply in economic analysis?

Factors other than those being considered are held constant

Graphical expression

visual representatives that show relationships between variables, simplifying complex ideas.

Generalizations

Economic principles are ideas that describe common behaviors of consumers, workers, or businesses. For example, most people buy more when prices drop, though not everyone does.

Economists develop economic principles and models at two levels….

microeconomics and macroeconomics

Microeconomics

how individuals, households, and businesses make decisions. It looks at specific details like product prices, firm income, or family spending choices.

What does microeconomics focus on?

Decision making by individual units such as households and firms.

Macroeconomics

how the economy works as a whole. It looks at big topics like growth, inflation, interest rates, and how governments, households, and businesses interact.

What does macroeconomics primarily focus on?

Economic growth and the business cycle.

aggregate

A collection of specific economic units treated as if they were one unit.

Example of aggregates

Lump together the millions of consumers in the U.S. economy and treat them as one huge unit called "consumers."

Positive economics

studies facts and cause-effect relationships. It avoids opinions and focuses on understanding economic behavior to help create better policies.

What does positive economics focus on?

Facts and cause-and-effect relationships

Normative economics

focuses on opinions about how the economy should work or what policies ought to be used, often based on ethical or societal views.

What does normative economics involve?

Value judgments about economic policies

Example of normative statement

France ought to undertake policies to make its labor market more flexible to reduce unemployment rates (ought/should = normative)

Positive statement

The unemployment rate in France is higher than that of the United States.

The economic perspective stresses…..

(a) resource scarcity & the necessity of making choices (b) assumption of purposeful (or rational) behavior (c) comparisons of marginal benefit and marginal cost.

economic resources (factors of production.)

The land, labor, capital, and entrepreneurial ability that are used to produce goods and services.

Land

Natural resources (water, wind power, sunlight, forests, oil deposits, mineral, and arable land)

Labor

physical actions and mental activities that people contribute to the production of goods/services. (retail clerk, teacher, football player, and physicist)

Capital

All human-produced physical objects (or capital goods = factory, storage, transportation, and distribution facilities) and intangible ideas (intellectual property, inventions, and recipes) used to produce consumer goods and services.

Consumer goods

products/services that satisfy human wants directly

****TAKE NOTES

Consumer goods satisfy wnats directly, capital does so indriectly by aiding in the production of consumer goods.
ex) large baking oven (capital) combined with recipe (intangible idea) makes bread (consumer good)

• capital doesnt refer to money bc money produces nothing

• capital and investment are related, investment is restrictive definition- expenditures that increase volume of physical capital (roads facotries etc) and intangible ideas

Entrepreneurial ability

a special human resource that combines land, labor, and capital to create new products or improve existing ones through innovation and decision-making.

What is the main purpose of entrepreneurial ability in the economy?

To combine economic resources to produce new products or innovations.

Entrepreneurs

Individuals who provide entrepreneurial ability to firms by setting strategy, advancing innovations, and bearing the financial risk if their firms do poorly.

***NOTE

bc land, labor, capital and entrepreneurial ability are combined ot produce goods/services, they are called factors of production (The four economic resources: land, labor, capital, and entrepreneurial ability.)entrepreneurial ability or inputs

Economizing problem

Need to make choices because economic wants exceed economic means

necesssities

food shelter clothingluxuiri

luxuries

perfumes, yacht, and sports cars

budget line or budget constraint

Shows the choices a consumer can make between two goods using a fixed income. It highlights trade-offs and constant opportunity costs between the goods.

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NOTE

budget line varies w/ income. if there is an increase in income, budget lines shifts right, a decrease and it shifts to the left.

Full employment

The economy is employing all of its available resourcesFix

Fixed resources

The quantity and quality of the factors production are fixed.

Fixed technology

The state of technology (the methods used to produce output) is constant.

Two goods

The economy produces only two goods: consumer goods and capital goods (physical capital).

ex: Pizza (consumer goods - satisfies us directly) and industrial robots (makes more pizza a lot faster)

Production possibilities table

Lists the different combinations of 2 products that can be produced with a specific set of resources under full employment.

***NOTE

Hypothetical economy A devotes resources to pizza as wel as E to robots. unrealistic as an economy produces both typically,.

***NOTE

generalization: a fully employed economy must sacirifce one good to obtain more of another..

Production possibilities curve

Shows the maximum amounts of two goods a society can make using limited resources and limitedtechnology. Choosing more of one good means less of the other.

What does the production possibilities curve represent?

Different combinations of goods and services that society can produce in a fully employed economy.

Law of Increasing Opportunity Costs

means producing more of one good leads to higher trade-offs, as resources are less effective when shifted to new uses.

What does the Law of Increasing Opportunity Costs state?

As the production of a good increases, the opportunity cost of producing an additional unit rises.

Economic rationale

Resources are not perfect for all uses, so producing more of one good means using less efficient resources, which raises costs. This shows resource limits in production.

The economic rationale for the law of increasing oppportunity costs it that….

economic resources are not completely adaptable to alternative uses.

What is the economic rationale for the law of increasing opportunity costs?

Economic resources are not completely adaptable to alternative uses.

Optimal Allocation

occurs where marginal benefit (MB) equals marginal cost (MC). Resources are allocated efficiently by expanding production until MB equals MC. If MB exceeds MC, production should increase; if MC exceeds MB, it should decrease. This ensures maximum satisfaction and efficient use of resources, aligning production with societal needs and preferences.

**NOTE

Unemployment happens when resources are not fully used, placing the economy inside the production possibilities curve. Full employment moves production to the curve, maximizing goods output.

**NOTES: advances in technology

Technology helps make better goods and improves production methods. For example, AI systems help produce more items like robots and pizzas using the same resources.

Economic growth is the result of…

1. increase in supplies of resources

2. improvements in resource quality

3. technological advances

Present choices and future possibilities

An economy’s choices today impact future growth. Choosing “present goods” like food satisfies current needs, while investing in “future goods” like education promotes stronger future growth.

Present goods examples

consumer goods: food, clothing, entertainment

Future goods examples

preventative medicine, education, research, capital goods

International Trade

Countries face limits on production, but international trade helps overcome these limits. Nations specialize in goods they produce efficiently and trade them to increase output and consumption.