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