1 The Study of Opportunity Cost

What are the two main sources of Economics Growth?

1.) Increase in the availability of resources. 2.) Increase in the ability of resources.

FILL IN THE BLANK A Counterfactual is .

A Counterfactual is an educated guess as to what would have happened had a policy or an event not occurred.

FILL IN THE BLANK A Production Possibilites Frontier (PPF) represents ________________.

A Production Possibilities Frontier (PPF) represents ALTERNATIVE OUTPUT COMBINATIONS THAT ARE THE MOST POSSIBLE.

FILL IN THE BLANK A Production Possibilities Frontier (PPF) represents the (maximum/least) amount of one good that can be produced for a given amount of another good.

A Production Possibilities Frontier (PPF) represents the Maximum (maximum/least) amount of one good that can be produced for a given amount of another good.

FILL IN THE BLANK A Production Possibilities Frontier (PPF) represents the of one good that can be produced for any given amount of another good.

A Production Possibilities Frontier (PPF) represents the most of one good that can be produced for any given amount of another good.

FILL IN THE BLANK A Resource is anything that is consumed directly or .

A Resource is anything that is consumed directly or used to make things that will ultimately be consumed.

Define Positive Analysis:

A form of analysis that seeks to understand the way things are and why they are that way. *OBJECTIVELY*

Define Normal Analysis:

A form of analysis that seeks to understand the ways things should be.

Define Good:

A generic term for anything we consume. -Example: Soda, Pizza, etc.

Pick & Choose Which of the following would constitute an incentive? (1?) A Subsidy. (2?) A Price. (3?) A Regulation for which there is not consequence for its violation. (4?) A Tax.

(1!) A Subsidy: (2!) A Price: (4!) A Tax:

PICK & CHOOSE: Which of the following are examples of Optimization? (1?) Consumers deciding which goods to buy with their money. (2?) Firms maximizing profit. (3?) A students cleaning a dorm room and choose not to make it perfect. (4?) A student cleaning a dorm room to make it perfect to the exclusion of all other useful things.

(1!) Consumers deciding which goods to buy their with their money: BECAUSE Companies are assumed to maximize profits and people are assumed to clean things until the benefits of cleaning more are not worth the time or effort. (2!) Firms maximizing profit: BECAUSE Consumers are assumed to be making decisions that maximize their happiness subject to a scare amount of money and people are assumed to clean things until the benefits of cleaning more are not worth the time or effort. (3!) A student cleaning a dorm room and choosing not to make it perfect: BECAUSE Consumers are assumed to be making decisions that maximize their happiness subject to a scarce amount of money and companies are assumed to maximize profits.

PICK, CHOOSE, & ILLUSTRATE The Circular Flow Model depicts the interactions of which of the following economic actors? (1?) Firms. (2?) Government. (3?) Religious Institutions. (4?) Households.

(1!) Households. (2!) Government. (4!) Households.

PICK & CHOOSE SCENARIO Growth can be the result of which of the following? (1?) Decreased capability associated with using many different resources. (2?) Having more resources available. (3?) Having fewer resources. (4?) Increased capability associated with using the same resources. (5?) Resources becoming expensive.

(2!) Having more resources available. (4!) Increased capability associated with using the same resources.

PICK & CHOOSE SCENARIO Increased education among workers would be associated with which source of economic growth? (1?) A decrease in the availability of resources. (2?) A decrease in the ability of resources to produce goods and services. (3?) An increase in the ability of resources to produce goods and services. (4?) An increase in the availability of resources.

(3!) An increase in the ability of resources to produce goods and services.

PICK & CHOOSE Hydraulic Fracturing makes Natural Gas available when it would otherwise be locked away. Which source of Growth is this? (1?) A decrease in the ability of resources to produce goods and services. (2?) An increase in the ability of resources to produce goods and services. (3?) A decrease in the availability of resources. (4?) An increase in the availability of resources.

(4!) An increase in the availability of resources.

Who are the 3 main actors in a Circular Flow Diagram?

-Households -Firms -Government

What are the 3 Main Factors of Production?

-Land. -Labor. -Capital.

Describe Production Possibilities Frontier (PPF):

A graph which relates the amounts of different goods that can be produced in a fully employed society. It shows alternative wats that an economy can use its scare resources. Graphically demonstrates Scarcity, Trade-Off, Opportunity Costs, and Efficiency. Each point represents a specific combination of goods that can be produced given employment of resources. Key Points include: Any point inside the curve is described as Inefficient/Unemployment; Any point along curve is described as Efficient. Any point outside of the curve Impossible/Unattainable (given current resources).

Define Factor (or Resource) Market:

A mechanism by which buyers and sellers of goods and services negotiate an exchange.

Define Foreign Exchange Market:

A mechanism by which buyers and sellers of the currencies of various countries negotiate an exchae

Define & Describe Circular Flow Model:

A model that shows the interactions of the economic actors: Markets are where the interactions take place; Actors are the entities interacting. Shows how products, resources, and money flow in the economy.

Define Model:

A simplification of the real world that we can manipulate to explain the real world.

What is a Mixed Economy?

A system with Free Markets (Capitalism) but also some Centrally-Planned (Command) Economies present. -Example: Almost all countries, including the US, have Mixed Economies (Capitalism & Command).

Define Human Capital:

Any skills or knowledge gained by a worker through education and experience.

Define Resources:

Anything we either consume directly or use to make things that will ultimately consume.

Define Product Market:

Anywhere things are sold between buyer & seller. -Example: Computers are sold in the Product Market.

Define Trade-Offs:

ALL the alternatives that we give up when we make a choice.

FILL IN THE BLANK An . Assumption is the one that suggests that the person in question is trying to maximize some objective.

An Optimization Assumption is the one that suggests that the person in question is trying to maximize some objective.

Define Simplifying Assumption:

An assumption that may, on its face, be silly but allows for a clearer explanation.

DEFINITION Define Optimization Assumption:

An assumption that suggests that the person in question is trying to maximize some objective.

Define Optimization Analysis:

An assumption that suggests that the person in question is trying to maximize some objective.

What is a Free Market (Capitalist) Economy?

An economy letting individuals decide what to produce, how to produce it, and who gets it. Let the market do it all being called Capitalism. -Inspired by Adam Smith. He was a Scottish Economist, Philosopher, and Author as well as a Moral Philosopher, a Pioneer of Political Economy, and a Key Figure during the Scottish Enlightenment, also known as ''The Father of Economics'' or ''The Father of Capitalism''.

What is a Centrally-Planned (Command) Economy?

An economy where the government owns all the resources, owns the workers, and tells them where they can work, what jobs they should have. -Inspired from Karl Marx Ideologies. He was a German Philosopher, Economist, Historian, Sociologist, Political Theorist, Journalist and Socialist Revolutionary.

FILL IN THE BLANK An example of a company engaged in an Optimization would be their attempt to .

An example of a company engaged in an Optimization would be their attempt to maximize profit.

Define Specialized Growth:

An increase in the ability to produce a particular good because there is an increase in, or an increase in the ability of, resources to produce a particular good

Define Generalized Growth:

An increase in, or an increase in the ability of, resources to produce all goods

Define Market:

Any mechanism by which buyers and sellers negotiate an exchange.

FILL IN THE BLANK The reason that only a finite amount of a good can be produced even if everyone is focused on production of that good is. . .

Both (1) the capabilities of the resources are finite and (2) the resources are finite.

Define Opportunity Cost:

Can be defined as any of the following: -The forgone alternative of the choice made. AND/OR -What you would have done had you not done what you did. AND/OR -Most Desirable Alternative given up when you make a choice.

FILL IN THE BLANK Good Simplifying Assumptions will make the problem easier and. . .

Conclusions that spring from them are valid in a more complicated scenario.

What is the relationship between Specialization & Trade?

Countries should specialize in trade when they have Comparative Advantage. Countries should trade if they have a relatively lower opportunity cost.

What is the relationship between Capital Goods & Future Growth?

Countries that produce more capital goods will have more growth in the future.

Define Consumer Goods:

Created for direct consumption. -Example: Pizza

Define Capital Goods:

Created for indirect consumption. Goods used to make Consumer Goods. -Example: Ovens, Blenders, Knives, etc.

Define & Describe Law of Increasing Opportunity Cost:

Exists when the additional resources required to produce an additional unit grows as more output is produced. As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Graphically resulting as a bowed-out (concave) Production Possibilities Frontier (PPF). -Example: Pizza vs Robots.

Define Constant Opportunity Cost:

Exists when the additional resources required to produce an additional unit remains the same as more output is produced. Resources are easily adaptable for producing either good. Likely to occur when people are identical in their skills. Graphically resulting as a straight-lined (linear) Production Possibilities Frontier (PPF). This is not common. Example: Pizza & Calzones.

FILL IN THE BLANK Growth is where there is an increase in, or an increase in the ability of, resources to produce all goods. Growth is where there is an increase in the ability to produce a particular good because there is an increase in, or an increase in the ability of, resources to produce a particular good that does not generalize to other goods.

FILL IN THE BLANK Generalized Growth is where there is an increase in, or an increase in the ability of, resources to produce all goods. Specialized Growth is where there is an increase in the ability to produce a particular good because there is an increase in, or an increase in the ability of, resources to produce a particular good that does not generalize to other goods.

In general, what is the Opportunity Cost of moving from one point to another along the Production Possibilities Frontier (PPF)?

The amount of one good you have to give up to get another.

FILL IN THE BLANK If the Marginal Benefit of an action exceeds the Marginal Cost. . .

If the Marginal Benefit of an action exceeds the Marginal Cost. . . Do more of the action.

FILL IN THE BLANK EXAMPLE Suppose there are five types of people in the world: (1) those who are really good at producing pizza but not so good at producing soda; (2) those sort of OK at both; (4) those who are good at producing soda but not so good at producing pizza; and (5) those who are really good at producing soda but lousy at producing pizza. If you have already moved person #1 to soda and you want to produce even more pizza, you would have to move person #____ to pizza.

If you have already moved person #1 to soda and you want to produce even more pizza, you would have to move PERSON #2 to pizza.

Define Economic Efficiency:

In MICROeconomics, roughly speaking, a situation in which nothing can be improved without something else being hurt. Depending on the context, it is usually one of the following two related concepts: Allocative or Pareto efficiency: any changes made to assist one person would harm another. -Example: A farmer wants to sell part of his land. The individual that will pay the most for the land uses the resource more efficiently than someone who does not pay the most money for the land.

PICK & CHOOSE In order to know how many people would lose or gain health insurance from a particular proposed provision of law, you would need a good .

In order to know how many people would lose or gain health insurance from a particular proposed provision of law, you would need a good estimate of the benefits of the law, a counterfactual, and estimate of the costs of the law.

FILL IN THE BLANK In order to know where an Macroeconomic Policy worked in making the economy better than it would have been otherwise, you need a _________________.

In order to know where an Macroeconomic Policy worked in making the economy better than it would have been otherwise, you need a Counterfactual.

FILL IN THE BLANK In the context of a Production Possibilities Frontier (PPF), unemployment is a situation that occurs when production is .

In the context of a Production Possibilities Frontier (PPF), unemployment is a situation that occurs when production is Inefficient & Attainable.

Define Unattainable:

Levels of production that are not possible with the given resources.

Define Attainable:

Levels of production that are possible with the given resources.

USE THE DEFINITION DISPLAY The Opportunity Cost of producing the second unit of pizza given that one has already been produced is .

The Opportunity Cost of producing the second unit of pizza given that one has already been produced is 5.

FILL IN THE BLANK ______________________ is a form of analysis that seeks to understand the way things should be.

Normative Analysis is a form of analysis that seeks to understand the way things should be.

FILL IN THE BLANK EXAMPLE North Dakota Oil Producers were striking oil through 2012-2015 and they were all getting rich. Had they assumed that everyone else's success was a good sign for them, they would have fallen victim to the Fallacy of .

North Dakota Oil Producers were striking oil through 2012-2015 and they were all getting rich. Had they assumed that everyone else's success was a good sign for them, they would have fallen victim to the Fallacy of Composition.

FILL IN THE BLANK Points that lie on or inside the Production Possibilities Frontier (PPF) are .

Points that lie on or inside the Production Possibilities Frontier (PPF) are Attainable.

How is Economic Growth modeled?

Production Possibilities Frontier (PPF).

Define Incentive:

Something that influences the decisions we make. -Examples: Prices influence the amount we buy; taxes influence how much we work and save.

Define MICROeconomics:

Study of small economic units such as individuals, firms, and industries.

Define MACROeconomics:

Study of the large economy as a whole or economic aggregates.

FILL IN THE BLANK SCENARIO Suppose you know from history that every time the winner of your local high school basketball sectional tournament is a smaller school than the runner-up, that a recession has followed the next year. If you acted on the assumption that it would happen again, . .

Suppose you know from history that every time the winner of your local high school basketball sectional tournament is a smaller school than the runner-up, that a recession has followed the next year. If you acted on the assumption that it would happen again, you would have fallen victim to the fallacy that Correlation and Causation are the same.

FILL IN THE BLANK EXAMPLE Suppose you know from history that every time the winner of your local high school basketball sectional tournament is from a smaller school than the runner-up, a recession has followed the next year. If you acted on the assumption that it would happen again, you would have fallen for the Fallacy that Correlation and __________________ are the same.

Suppose you know from history that every time the winner of your local high school basketball sectional tournament is from a smaller school than the runner-up, a recession has followed the next year. If you acted on the assumption that it would happen again, you would have fallen for the Fallacy that Correlation and Causation are the same.

FILL IN THE BLANK EXAMPLE Suppose you understand that a grower of lettuce will have a more profitable season if they have a great crop. Suppose you conclude that all growers of lettuce would have profitable seasons if all growers had great crops. You would have fallen victim to the ___________________.

Suppose you understand that a grower of lettuce will have a more profitable season if they have a great crop. Suppose you conclude that all growers of lettuce would have profitable seasons if all growers had great crops. You would have fallen victim to the Fallacy of Composition.

Define Frontier:

Term used to describe the boundary of production.

Define The Invisible Hand of Capitalism:

The concept that society's goals will be met as individuals seek their own self interest. Competition and self-interest act as an Invisible Hand that regulates the Free Market (Capitalism). -Example: If society wants sell cell-phones then... Profit seeking producers will make more. Competition between firms results in low prices, high quality, and greater efficiency. The government doesn't need to get involved since the needs of society are automatically met.

Define Net Benefit:

The difference between all benefits and all costs.

Define Marginal Benefit:

The increase in the benefit that results from an action

Define Marginal Cost:

The increase in the cost that results from an action.

Define Fallacy of Consumption:

The mistake in logic that suggests that the impact of something is always and simply equal to the sum of the individual parts.

Define Correlation = Causation:

The mistake that suggests that because two variables are correlated that one caused the other to happen.

Define Investment:

The money spent by BUSINESSES to improve their production.

What do points along Production Possibilities Frontier (PPF) represent?

The most of one good that can be produced for a given amount of the other good.

Define Absolute Advantage:

The producer that can produce the most output OR requires the least amount of inputs (resources). -Example: The US has an Absolute Advantage in shoes.

Define Comparative Advantage:

The producer with the lowest Opportunity Cost. -Example: The US has a Comparative Advantage in movies.

Define Economics:

The study of the allocation and use of scarce resources to satisfy unlimited humans wants.

FILL IN THE BLANK Unattainable levels of production are . with the given resources.

Unattainable levels of production are not possible with the given resources.

Define Scarcity:

We have unlimited wants but limited resources. -Since we are unable to have everything we desire, we must make choices on how we will use our resources.

Define Unemployment:

You think of unemployment as the condition of someone wanting a job but not having one. Economists do not disagree but expand that definition to resources