Chapter 1: Limits, Alternatives, and Choices
The Economic Perspective
Scarcity and Choice
Purposeful Behavior
Marginal Analysis: Comparing Benefits and Costs
We are limited in choice because of a scarcity of oppurtunity
Oppurtunities are lost when we pick a choice
Utility - obtained satisfaction from consumption
People decide on the hopes of a desired outcome.
Personal utility can increase in service of others
Most choices require change from the current status
Make decisions from comparison of benefit to cost. If cost greater than benefit, don't make the decision and vice versa.
Theories, Principles, and Models
Scientific Method is relied on by economics
A well tested theory becomes an economic principle or law
Economic Principles - the behavior in the economy, but not the explanation for why it happens.
Other-things-equal assumption
Graphical Expressions
Generalizations
Factors, other than those being changed, do not change
Principles are true for a group, not for an individual
Many models are expressed graphically
Microeconomics and Macroeconomics
Microeconomics
Macroeconomics
Economics concerned with the decision making of individuals
Economics concerned with the decision making of a whole
Positive and Normative Economics
An aggregate is a collection of specific economic units treated as if they were one unit.
Positive
Focuses on facts and cause/effect relationships
Normative
Value judgments based on what the economy should be and what decisions should reach to an economic decision.
Individual's Economizing Problem
Definition of economizing problem
Limited Income
Unlimited Wants
A Budget Line
Attainable and Unattainable Combinations
Trade-Offs and Opportunity Costs
Income Changes
Wants exceed means requiring choice
Income is finite
Income comes in the form of wages, interest, rent, and profit
necessities - required for survival
luxuries - improve quality of life
wants can have biological roots, or societal roots
Two things that satisfy wants: goods and services
Limitless wants but limited income requires us to economize
Definition of Budget Line
aka budget constraint
A graphical curve of combinations of two products a person can purchase wit a limited income.
Analysis generalizes to the full range of products
Attainable combinations are below the budget line
Choice
Unattainable combinations are above the budget line
In order to obtain a quantity of one product, you must give up a quantity of another product
The constant slope represents constant opportunity cost
Often, you must take into account trade-offs and attainable combinations to make the best combination choice
increase in income shifts budget line to right
Decrease in income shifts budget line to left
Society's Economizing Problem
Scarce Resources
Scarce economic resources (any products used in the production of goods and services)
Resource Categories
Capital
Entrepreneurial Ability
Labor
Land
All natural resources
services provided for production of goods and services
Manufactured aids for producing goods and services
Factory, storage, transportation, machinery
Capital goods aid the production of consumer goods
Decides - makes business decisions
Innovates - create new products, production techniques, business organization
Catalyzes - combines all resources
Risks - devotes time and resources in risk of loss over success
Factors of Production/Inputs
All resource categories combined to produce goods and services
Production Possibilities Model
Definitions
Fixed resources
Fixed technology
Full employment
Two goods
Capital goods
Consumer goods
Products that satisfy wants directly
Products that supports the production of consumer goods
The economy employs all available resources
The quantity and quality of the factors of production are fixed
The state of technology is constant
Production Possibilities Table
Extremes are unrealistic
Society shifts to the one side based on its prioritization of a capital good over a consumer good.
Production Possibilities Curve
Data in a PPT represented in a graphical format
Opportunity Cost
Marginal Opportunity Cost
Total Opportunity Cost
Cost of producing 1 unit of a product compared to producing 1 unit of another product
Cost of producing a product compared to another product under the limit of a budget line.
output of capital goods on vertical axis, output of consumer goods on horizontal axis
Law of Increasing Opportunity Costs
Economic Rationale
Shape of the Curve
As production of a good increases, opportunity cost increases
The slope tells the relationship between two changes in quantity of two goods
Economic resources are not entirely adaptable
Greater production = lower quality of resources
Lack of resource flexibility creates larger opportunity costs
Economic Allocation
The optimal amount is when marginal benefit = marginal cost
Unemployment Growth and the Future
In reality, the model doesn't always work because not all resources are employed
Unemployment of resources is represented on the graph by points inside the curve
A Growing Economy
Factors
economic growth
Advances in Technology
The outward movement of a PPC
Increases in Resource Quality
Increases in Resource Supplies
Present Choices and Future Possibilities
An economies current choice on PPC can affect future economics
Goods for the future are capital goods
Goods for the present are consumer goods
A Qualification International Trade
Nations specialize in the production of goods with the least opportunity cost
Exchange for goods at lower opportunity costs begins internationally