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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