Microeconomics 1

4 Broad Categories of Resources

Land, Labor, Capital, Entrepreneurial Ability

Scarcity involves..

Tradeoffs

Buying a car for themselves, working at a job, attending a concert etc. is an example of what

being self interested

who said “to be a good economist you must train yourself to see the unseen”

Frédéric Bastiat

Optimization

is the process of making the best possible use of resources to achieve desired outcomes, often involving trade-offs between different options.

Marginal Benefit

is the additional satisfaction or utility that a consumer derives from consuming one more unit of a good or service, compared to the cost.

Marginal Cost

is the additional cost incurred from producing one more unit of a good or service, which is crucial for determining optimal production levels in economics.

Eating an ice cream cone is a…

Marginal Benefit

Making ice cream cones is a…

Marginal Cost

Marginal Costs tend to fall or rise

rise

Marginal benefits tend to fall or rise

fall

Diminishing Marginal Benefit

as you do more of something in a specific time period, you enjoy it less and less

Law of increasing opportunity costs

as you produce more of a single good, the opportunity cost (the value of the next best alternative you give up) of making each additional unit grows larger

if the marginal benefit is greater than the marginal cost

DO IT

If the marginal benefit is less than the marginal cost

DONT DO IT

Optimal Level

MB=MC

Comparative Advantage

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

the U.S. has a ___ in producing airplanes, while Brazil has a ___ in producing coffee, so they specialize and trade.

comparative advantage

Specialization

when individuals, businesses, or nations focus on producing a limited range of goods or services instead of trying to make everything themselves

Production possibilities schedule

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

Production Possibilities Frontier

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

Constant Opportunity Costs:

 A characteristic of production whereby the opportunity cost associated with increasing the production of one good or service, in terms of another, is constant at every level of production.

Efficient Allocation of Resources

Allocation of resources in such a way that is it possible to increase the production of one good only by decreasing the production of another.

Inefficient Allocation of Resources

Allocation of resources in such a way that is is possible to increase the production of once good without decreasing the production of another.

In the circular flow model, firms can produce the output they sell to households only by

buying resources from households.

Marginal Decision Making

People make choices in small increments

farm using most of its land to grow crops that few people need instead of crops that are in high demand is an inefficient allocation of resources.

Inefficient allocation of resources

a factory uses its workers and machines to produce goods that are in high demand, maximizing output and meeting consumers’ needs.

efficient allocation of resources

a factory produces 1 car for every 2 computers it gives up, no matter how many cars it makes.

constant opportunity cost

An economy is better off when it stops producing output at the point where

MB=MC

Entrepreneurial Ability

The ability and vision to combine land, labor, and capital into a productive process, taking on the risks and rewards that are inherent in any new venture

Marginal Cost

The additional cost associated with one more unit of an activity