Microeconomics Chapter 1: Limits, Alternatives, and Choices
the budget line illustrates
1. attainable and unattainable points, 2. trade offs and opportunity costs 3. limited incomes and positive prices, and 4. income change budget line shifts
what are the 4 functions of an entrepreneur with entrepreneurial ability?
1combines resources needed for production 2 make basic business policy decisions 3 innovator for new products, production techniques, organizational forms 4 bears the risk of time, efforts, and funds
in fig. 1.3 we see that the optimal amount of pizza is
200,000 units/ when marginal benefits cover marginal cost
what are the 4 factors of production?
Land, Labor, Capital, and Entrepreneurial ability
When is it advantageous for society to produce an additional product to consume?
When the marginal benefit of consuming the product is higher than the additional cost of the product.
what is the Post hoc fallacy
a causation fallacy when two events occur in sequence the first event is not always the cause of the 2nd event
the location of a budget line depends on
a consumer's money income and the prices of the two products under analysis
opportunity costs are always present whenever...
a decision is made
if economics was a beach macroeconomics would be
a general overview of the entire beach (no specifics like sand, rock, and shells)
a production possibilities curve is
a graphical representation of choices
a growing economy results in
a larger total output and an outward shift of the production possibilities curve PPC
a budget line is
a schedule or curve that shows the various combinations of two products a consumer can purchase with a specific money income
what is entrepreneurial ability?
a special kind of human resource supplied by entrepreneurs
positive economics describes the economy as it
actually is , it avoids value judgments and attempts to establish scientific statements about economic behavior
what are factors of production?
all natural, human, and manufactured resources used to produce goods and services
imperfect info about a fast food line may result in...
an unexpected wait or some people leaving when they see a long line
capital goods
are used to produce consumer goods to indirectly satisfy wants
points inside the budget line represent
attainable purchases given relevant income and prices
a third factor may
be the cause in a correlation causation fallacy
why do fast food lines tend to have equal lengths?
because people shift from longer to shorter lines in an effort to save time
wants include
both necessities and luxuries (economists don't care)
products that are promoted as "free" may actually be
bundled with another good for which the consumer must pay; because a purchase is required to obtain them these products are not really free to the buyer
synonym for "other things equal"
ceteris paribus
scarcity requires that ...
choices be made
limited incomes and positive prices force people to
choose (tells what they can choose not what they will choose)
the combination of limited income and unlimited wants force us to
choose certain goods and services that would maximize our utility
marginal analysis
comparison of benefits and costs usually for decision making
the negative slope of a budget line represents that
consumers must make trade offs in their consumption decisions
most decisions concern a change in
current conditions such as benefits and costs (marginal analysis)
production possibilities tables and curves are
devices used to illustrate and clarify society's economizing problem
different preferences and circumstances (including errors) lead to...
different choices
consumer goods
directly satisfy wants
when a customer reaches the counter
economic decisions/choices on what to order are made based on a comparison between costs and benefits of possible choices
generalization in economics
economic principles are expressed as tendencies of the typical or average consumer, worker, or business firm
the economic rational for the the steepness of the curve/ increasing opportunity costs is that
economic resources are not completely adaptable to alternative uses ( a pizza maker will struggle to make robots and vice versa)
economists use the scientific theory to...
establish theories, laws, and principles
what is the correlation vs causation fallacy
events may be related without a causal relationship
limited income
everyone even the most wealthy has a finite amount of money to spend
the marginal cost of an action should not
exceed its marginal benefits
principles are used to
explain and/or predict the behavior of individuals and institutions
for Gates, Winfrey and Rodriguez the opportunity cost of college was
extremely high because they would not be able to make money while going to and paying for college
synonym for economic resources
factors of production
what are the 4 assumptions made by PPCs (production possibilities curves)
full employment, fixed quality and quantity of resources at this time, technology is constant during analysis, and the economy produces only 2 types of products
the college decision requires weighing...
future benefits (earnings) against cost (direct costs: tuition and indirect costs: foregone wages)
the budget line model assumes two goods but...
generalizes to all goods available to consumers
what two things satisfy wants
goods and services
in general those attending and completing college will earn
greater lifetime earnings than those holding only high school diplomas
specialization and trade have the same effect as
having more and better resources of improved technology
what is labor?
human resources which include physical and mental abilities used in production
define the ceteris paribus assumption
in order to judge the effect one variable has upon another it is necessary to hold other contributing factors constant
opportunity costs are measured
in real terms rather than money
how is utility measured ?
in utils
what are the three main reasons for economic growth?
increases in quantity of resources, improvements in quality of resources, advances in technology employed in production or distribution
the slope of the PPC (production possibilities curve) becomes steeper (bowed out and concave origin) to demonstrate
increasing opportunity costs
what is capital?
investment goods which are all manufactured aids to production like tools, equipment, factories, transportation, etc.
principles, laws, theories, and models are used
like synonyms with custom or convenience governing the choice in each particular case
the means to satisfy a human's wants are
limited
rational self-interest entails
making decisions to achieve maximum utility
the economic perspective is largely focused on ...
marginal analysis
companies provide "free" goods as a
marketing strategy to promote brand awareness
marginal costs rise as
more of a product is produced fig 1.3
what is land?
natural resources or gifts of nature
advantage of natural scientists vs economists
natural scientists can precisely test using using controlled laboratory experiments but economists must test their theories using the real world
most disagreements among economists involve
normative value based questions
products that are provided for free to an individual are not free...
not free for society because of the required use of scarce resources
the scientific method consists of ...(5 things)
observation of facts/real data, hypotheses, hypothesis testing, reviewing the hypothesis, and continued testing (to become a theory, law, principle, or model)
cattle rancher composition fallacy
one individual cattle rancher gets a lot of money per cattle sold but the prices of cattle fall as more ranchers sell cattle
resources can only be used for
one purpose at a time
example of the composition fallacy
one stockholder sales of share leads to wealth but a large number of stockholders selling large number of shares leads to less wealth
greater income will shift the budget line
out and to the right which allows consumers to purchase more of both goods
unlimited wants
people's wants are virtually unlimited
what are biases?
preconceptions that are not based on facts
the slope of the graphed budget line is the ratio of the
price of the good measured on the horizontal axis (Pb) / price of the goods measured on the vertical axis (Pdvd)
whether the economic decision is personal or made by a business or government the ...
principle of marginal analysis is the same
many economic relationships can be demonstrated...
quantitatively with graphs and key graphs
Choices will be necessary because
resources and technology are fixed (table 1.1)
increasing income lessens
scarcity (but does not eliminate it)
rational self interest is not the same as...
selfishness
income changes will
shift the budget line
economics
social sciences concerned with how individuals, institutions, and society make optimal/best choices under conditions of scarcity.
the optimal point depends on
society and is a normative decision
in fig 1.3 marginal benefits decline as
society consumes more pizza
microeconomics looks at
specific economic units
principles, laws, theories, and models are
terminology/terms that refer to generalizations about economic behavior
what is loaded terminology?
terms that contain prejudice and value judgments of others
beyond 200,000 units/ the optimal ...
the added benefits would be less than the added costs (bad)
at less than 200,000 units...
the added benefits would exceed the added costs (so you need to make more pizza)
the opportunity cost is
the amount of other products that must be forgone to obtain more of any given product
What is the optimal?
the best product mix on some point on the curve
opportunity costs
the cost of any good service or activity is the value of what must be given up to obtain it ie. the value of the next best thing foregone
What is optimal allocation?
the decision of society to use a specific optimal point on the PPC
what determines if we have more or less economic growth in the future?
the decisions on how to allocate resources in the present
scarcity
the economic resources needed to make goods and services are in limited supply
macroeconomics examines
the economy as a whole
full employment means
the economy is employing all available resources
if economics was a beach microeconomics would be
the examination of sands, rocks, and shells (not the beach
a hypothesis is
the formulation of cause and effect relationships based on facts
microeconomics is concerned with
the individual industry, firm, or household and the price of specific products and resources
the optimal production of any item is where
the marginal benefit is equal to its marginal cost (7000 robots in fig 1.3)
each option considered weighs
the marginal benefit to the marginal cost
points on the curve of a PPC represent
the maximum possible combinations of the two products (pizza and robots)
the law of increasing opportunity cost says
the more of a product produced the greater is its (marginal) opportunity cost
the value of the slope measures precisely
the opportunity cost of one or more units of a good under analysis
utility
the pleasure happiness or satisfaction obtained from consuming a good or service
utility is
the pleasure or satisfaction obtained from consuming a good or service
market prices are not part of
the production possibilities model
individuals are confronted with the need to make choices because
their wants exceed their means to satisfy them
what are purposeful simplifications
theories, principles, and models
a common economic lunch expression
there is no free lunch
how can a nation avoid the output limits of its domestic production possibilities?
through international specialization and trade
why do people choose the shortest line?
to reduce time cost
macroeconomics includes the measures of
total output, total employment, total income, aggregate expenditures, and general price level
points outside the curve are
unattainable at present
points outside the budget line represent
unattainable purchases with given income and prices
points inside the curve represent
underemployment or unemployment
Human wants are ...
unlimited
what is a choice for future over present consumption?
using resources to invest in technological advances, education, and capital goods
what is a choice for present over future consumption?
using resources to produce consumer goods and services
normative economics involves
value judgments about what the economy should be like and the desirability of the policy options available
economic resources are limited relative to
wants
do wants stay the same?
wants change especially as new products are introduced
what is the fallacy of composition
what is true for one individual or part of a whole is true for a group of individuals or the whole
when does unemployment occur
when the economy is producing less than full employment or inside the curve (point U in fig 1.4)
When is it not worth it for society to produce an additional product to consume?
when the marginal cost of obtaining an additional product is more than the additional benefit received
a positive relationship between education and income does not tell us
which causes the increase in the other ( or which is independent or dependent)
a change in the price of one of the goods
will change the slope of the budget line and change the purchasing power of the consumer
the cost of obtaining more info about a fast food line is not...
worth the benefit