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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

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