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| How individuals, institutions, and society make optimal choices under conditions of scarcity |
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| The idea that "we can't have it all;" Forces us to decide on one product over another |
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An economic way of thinking |
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Scarcity forces you to choose one item or path over another - the item/path you did not choose is your sacrifice - your oppurtunity cost |
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People make decisions with some rational outcome in mind |
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| Pleasure, happiness, or satisfaction obtained from consuming a good or service |
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| Comparison of the added benefits versus the extra costs of two products |
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The added UTILITY (Pleasure, happiness, satisfaction) of a particular choice |
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The extra cost of an item you want because of its personal UTILITY; you must forgo buying or spending time on something else to obtain this item |
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| Scientific Method (Oh, god why does every textbook drill this into your head) |
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The observation of real - world outcomes Hypothesis (possible explanation for cause/effect) Testing by comparing specific events to prediction Acceptance, rejection, or modification of hypothesis Continued testing until hypothesis becomes a theory |
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well - tested and widely accepted theory regarding probable effects of certain actions |
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| Economic principles can be expressed as the general tendencies of typical or average consumers, workers, or buisness firms |
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| Like in science, the assumption that only the one variable will change; known as Other-Things-Equal Assumption |
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Big word meaning that economic principles usually have graphs accompanying them |
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The study of the general areas of economics: government, household, buisness sectors (aggregates) |
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A collection of units refered to as if they were one whole unit (Economic word for population) |
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| Macroeconomics Subject Matter |
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| Total output, total employment, total income, aggregate expenditures, and general price levels |
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| The study of specific units in economics: a person, a household, a firm, or an industry |
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Focuses on facts and cause/effect relationships; description, theory development, theory testing; WHAT IS versus what should be |
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| Focuses on ideals of what the economy SHOULD be; subjective value judgements; focuses on desirability of certain aspects of the economy |
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| The need to make choices because of scarcity |
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| Scarcity of money; even the wealthy have a finite amount to spend |
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| Even the poorest of us want everything |
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| As people, we want both necessities and luxuries |
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| Anything required for basic survival |
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| Everything else not needed specifically for basic survival |
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| A curve that shows combinations of two products a consumer can purchase with a specific money income; the analysis generalizes to the full range of products available |
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| Attainable and Unattainable Combinations |
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| (see graph, page 9);All combinations displayed by the budget constraint - some fall above the line, others fall below. Those above the line are above your price range. |
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| To obtain more of product A, you must buy less of product B. Product B becomes the oppurtunity cost. |
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| The location of the 'budget line' in a budget constraint graph varies with monetary income; an increase shifts the line to the right, a decrease, to the left. |
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| Society's Economizing Problem |
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Society must also make choices regarding what it will spend its limited human resources on |
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Four types: Land Labor Capital Entrepreneurial Ability (The human resource) |
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| Land is ALL natural resources used in production, like arable land, forest, mineral, oil, and water |
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Physical/mental talents of individuals used in production; the workers |
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| All manufactured aids used in production: machines, storage, etc. |
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| The purchase of capital goods |
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| Capital goods versus Consumer goods |
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| Consumer goods satisfy wants directly, capital goods do so indirectly by aiding production |
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The money set aside to purchase capital goods |
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| The entrepreneur combines the three resources to produce a good or service; makes strategic buisness decisions; innovates new products; takes risks since there is no garuntee of profit |
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| The four resources: Land, Labor, Capital, and Entrepreneurial Ability; you need all four to produce something |
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| Production Possiblities Model |
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| A graph showing every combination of the production of Products A and B, possible or not |
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| Assumptions regarding the Production Possiblities Model |
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Full employment of resources Fixed quantity and quality of resources Fixed state of technology used to produce output Two good limit |
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| Law of increasing Opportunity Cost |
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Definition
As the production of Product A increases, the opportunity cost of producing an additional unit rises |
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| Shape of Production Possibilities Curve |
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Definition
The law of increasing opportunity costs is reflected when you notice that the curve becomes steeper from Point A at the top to Point E at the bottom (You must give up succesively larger amounts of B to get more A - 1,2,3,4 of B to get 1,1,1,1 of A) |
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Economic resources are not completely adaptable for all uses. When production of Product A increases, resources not as rich must be used. (Ingredients for pizza must come from less fertile land once all the best land is already in use) |
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| What amounts of Product A and B should be produced? When the Marginal cost and marginal benefit are graphed, we can see the point of intersection, where the MB and MC are equal monetary amounts. Calculate seperately and then find your (x,y) on the production curve. |
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Result of increasing in supply of resources, improvements in resource quality, or technological advances |
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Unemployment on the Production curve |
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| Anything below the possiblities line shows that there are not enough workers to achieve full production potential |
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Present choices versus Future possiblities |
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| Product B is a robot to increase future production - producing more today means the curve grows in the future, but Product A can be sold immediately for profit |
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