Chapter 1: Limits, Alternatives, and Choices

• Unlimited wants, scarce resources

• Economics - Social science of how individuals, institutions, + society make choices under scarcity

  • Opportunity cost - Value of the good, service, or time forgone to obtain something else
  • “There is no free lunch”

• Economic perspective - Economic way of thinking

  • Utility - Pleasure/happiness/satisfaction from consuming good/service
  • Purposeful behavior - People make decisions w/ desired outcomes in mind
  • Consumers + institutions make rational decisions by comparing marginal costs + marginal benefits
  • Marginal analysis - Comparisons of marginal benefits + marginal costs for decision making

• Economists use the scientific method -- Form + test hypotheses of cause & effect relationships → Generate theories, laws, + principles

  • Economic principle - Widely-accepted theory; statement about economic behavior that allows for predictions of effects of certain actions
  • Combine theories into representations called models
  • Economic principles are generalizations
  • Other-things-equal assumption - Assumption that factors other than those being considered do not change

• Microeconomics - Concerned w/ individual units (person, household, firm, industry)

  • Observes details of small part of economy
  • “The sand and shells”

• Macroeconomics - Examines either the entire economy or basic aggregates (gov’t, business sectors)

  • Aggregate - Collection of specific economic units treated as 1 unit
  • General overview of economy + relationships of major aggregates
  • “The beach”

• Positive economics - Facts + cause-and-effect relationships

  • Avoids value judgements
  • Scientific statements
  • “What is”

• Normative economics - Value judgements about what the economy SHOULD be like

  • Desirability of certain parts of the economy
  • Expresses support for certain economic policies
  • “What should be”

• Economizing problem - Need to make choices because economic wants exceed economic means

  • Unlimited desires, limited income
  • Budget line - Schedule or curve that shows various combos of 2 products that can be purchased with specific money income
  • Inside budget line = Attainable
  • Outside budget line = Unattainable

  

  • Trade-offs - Must give something up to get something else
  • Choice - Choose what to buy + what to forgo
  • Income changes - Budget line shifts w/ changes in income

• Economic resources - All natural, human, manufactured resources used for production of goods and services

  • Land - All natural resources
  • Labor - Physical + mental talents of individuals used in production
  • Capital - All manufactured aids used in production (ex. tools, machinery, etc.)
  • Entrepreneurial ability - Strategic business decisions, innovation, strategically combining resources, etc.

• Production possibilities model

  • Consumer goods - Products that satisfy wants directly
  • Capital goods - Products that satisfy wants indirectly
  • Production possibilities curve - Graph that shows different combos of goods + services that can be produced in fully employed economy
  • Assumes resource quantity, resource quality, and technology are fixed
  • Shows limit of attainable outputs
  • Bowed out from origin

  

• Law of increasing opportunity costs - As production of a good increases → Opportunity cost of producing an additional unit rises

  • Gain of one type of good or service → Always accompanied by loss of one type of another good or service
  • Resources not equally adaptable to different uses → Shifting resources from one use to another → Increasing opportunity costs

• Optimal allocation where Marginal Benefit = Marginal Cost (MB = MC)

  • Most desirable mix of goods

• Unemployment represented by point inside original production possibilities curve

• Economic growth - Growth of economic capacity; larger total output

  • Increased resource supplies
  • Advances in technology

• More focus on capital goods over consumer goods → Production possibilities curve further to the right

• International specialization + trade → Economy can consume MORE than production possibilities curve

  • International specialization - Directing resources at output that nation is efficient in producing
  • International trade - Exchange of goods for goods produced abroad

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