* the study of choice in times of scarcity

*every choice has a cost!

* the branch of economics that focuses on the choices made by households and the effects of these choices

(examples--how particular prices are determined, costs of production, market structure, market failure)

* the branch of economics that deals with the overall performance of the economy

(examples--GDP, unemployment, inflation, exchange rates, fiscal policy, monetary policy)

1. Every choice has a cost

2. People make better choices by thinking at the margin: people decide what to do by making small changes in their activities

3. Rational Self-Interest: people are involved in maximinzing behavior and respond predictably to opportunities for gain

4. Economic Models: simplified representations of the real world that help understand, explain and predict economic phenomena

* describes the economy or explains how the economy works

--it answers questions with facts, figures and evidence

--includes economic facts and economic theories

--positive economic statements can be empirically tested

* how the economy should be

--involves value judgments that cannot be tested with facts

--based on ethical standards and norms of fairness

--economic policy is closely related to normative economics

(example--"should all Americans have equal access to health care?")

* there are not enough goods or services to satisfy the wants and needs of everyone

--there are limited resources to satisfy unlimited wants and needs

Goods: tangible items that have value

Services: intangible activities that have value

* resources that are used in the prodcution of goods or services

(1) Land: all natural resources (raw materials, land, etc...) that are unimproved or unaltered by other factors of production

(2) Labor: all physical and mental efforts that people make available for production

(3) Capital: goods that are used to produce other goods and services (computers, tools, machinery, buildings, roads). Not Money!!!

(4) Entrepreneurship: person who organizes, manages and assembles factors of production, take rsiks, invents and creates new prodcuts or ways of doing things (Bill Gates; Henry Ford)

* the value of the best alternative sacrificed (the cost of any economic choice)

--scarcity is the cause of opportunity cost

--example: college education--opportunity cost includes tuition, fees, textbooks and foregone earnings. It does not include room & board

(this example will be on exam)

* shows the maximum combination of two goods an economy can produce with full employment of resources, fixed resources, and fixed technology

--note: point D is impossible

[image]

Efficiency: happens when it production operates along the curve (points A & B)

Inefficiency: happens when resources are not properly used and production occurs under the curve (point C)

--note: point D is impossible

[image]

* opportunity costs increase as more of a good is produced

--why? because resources are not completely adaptable to alterative uses

(example--increasing production means you might have to hire less skilled workers)

* as the number of sellers increases, supply increases

Prices of Other Goods

(prices of substitutes in production)

* as the price of a substitute in production increases, supply decreases

* as the price of a substitute in production decreases, supply increases

* as the price of one good increases, demand for the substitute good increases

* as the price of one good decreases, demand for the substitute good decreases

(example--as the price of Coke increases, the demand for the cheaper Pepsi increases)