ECO 2013 Chapter 1 - Key Terms (Vocabulary)

Economics is a social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.

Scarcity of choice: scarcity of goods and services restricts options and demand choices.
Since we cannot have it all, we must decide what we will have and what we must forgo.
By making one choice, we forgo the opportunity to make all other choices and lose the benefits of those other choices.
The loss of such benefits is the Opportunity Cost.
Purposeful behavior means people make decisions with some desired outcome in mind (satisfaction).
The desired effect is Satisfaction, i.e., the Utility of the decision.

In economics, Marginal means "extra", "additional", or "change in".
A choice usually leads to a change in the situation; the result of the change is marginal.
The gain from the extra result is the Marginal Benefit.
The cost spent to obtain the extra result is the Marginal Cost (and may be referred to as Marginal Loss).

Marginal analysis is the comparison between the expected Marginal Benefit and the expected Marginal Cost.
Opportunity cost is the value of the next best alternative forgone when making a choice (e.g., what is the opportunity cost of being a full‑time student?).
An economic principle is a tested, widely accepted theory about tendencies in economic behavior and the economy’s responses (e.g., how quantity and price relate).

The general principle of scientific approach in economics is ceteris paribus — all other things remain unchanged.
Many economic models are expressed graphically to facilitate understanding.

Macroeconomics: examines the economy as a whole by looking at aggregates (e.g., consumers, business sector, households, government) treated as single units.
Microeconomics: examines the economy at the level of individual units (e.g., a person, a household, a family, or an industry).
Aggregates: collections of specific economic units treated as a single unit.

Positive economics focuses on facts describing the observation of what is (e.g., "The US debt is in trillions of dollars").
Normative economics focuses on what would be desirable (e.g., "The US debt should not be over a trillion of dollars").

Individual economizing problems arise because wants exceed means: limited income and unlimited wants.
A Budget Line or Budget Constraint shows various combinations of two or more products a consumer can purchase with a specific money income.
It limits choices by considering opportunity costs.
Society’s economizing problems involve scarce resources: land (and land products), labor, capital, and entrepreneurial ability.
These inputs are called Factors of Production (or inputs) because they are combined to produce goods and services.

At any given time, a fully employed economy must sacrifice some of one good to obtain more of another.
The PPC shows the different combinations of goods and services society can produce with fixed resources and technology.
Points on the curve represent maximum combinations of two outputs given full employment of resources.
The curve is a constraint that shows the limits of attainable outputs.
Points inside the curve are attainable but indicate less total output (not fully employing resources).
Points outside the curve are unattainable with current resources and technology.

Each point on the curve represents a maximum output of the two products; the curve is a constraint on attainable outputs.
Inside the curve (implied underemployment) means the economy could increase output of one or both goods without additional resources if full employment is achieved.
Outside the curve would require more resources or better technology; such combinations are unattainable with current constraints.

As the production of a particular good increases, the opportunity cost of producing an additional unit rises.
This occurs because resources are not perfectly adaptable to alternative uses.
As the supply of the properly employed resources is reduced by increasing production, the cost of the proper resource rises, causing production costs to rise.

Economic decisions center on comparisons of marginal benefit (MB) and marginal cost (MC).
An activity should be expanded as long as MB > MC; optimal activity occurs where MB = MC.
$MB = MC$ is the point of optimal output; no resources should be allocated beyond this point.
Example (from Fig 1.3): optimal output occurs at point e with $200{,}000$ units of pizzas.

If the quantities and/or quality of resources or technology change, the PPC shifts position.
Growth or decline in the economy can occur with changes in resource availability, resource quality, or technology.
Present vs Future goods concept (Fig. 1.6):
- Present choices favoring present goods cause a modest outward shift in the PPC in the future.
- Present choices favoring future goods cause a greater outward shift in the PPC in the future.
This illustrates how current decisions about present vs future consumption affect future productive capacity.

Production possibilities analysis for a single nation implies there are limits to what can be produced domestically.
In reality, international trade allows specialization of production to fit export and import opportunities, expanding options beyond domestic PPC constraints.

Fig. 1: Graphing the direct relationship between consumption and income
- Two sets of data that are positively related (consumption and income) graph as an upsloping line.
- Example: $C = 50 + 0.5Y$ , where
- $C$ = Consumption per week, $Y$ = Income per week.
Fig. 2: Graphing the inverse relationship between ticket prices and game attendance
- Two sets of data that are negatively related (price and attendance) graph as a downsloping line.
- General idea: higher ticket price tends to reduce attendance; lower price tends to increase attendance.
Fig. 3: Infinite and zero slopes
- A line parallel to the vertical axis has an infinite slope: purchases of watches remain the same no matter how price of bananas changes.
- A line parallel to the horizontal axis has a slope of zero: consumption remains the same no matter how the divorce rate changes.
- In both cases, the two variables are totally unrelated.
Fig. 4: Determining slopes of curves
- The sl ope of a nonlinear curve changes from point to point.
- The slope at any point can be determined by drawing the tangent line at that point and calculating the slope of that tangent line.i