Basic Concepts of Economic Analysis Unit 1 Powerpoint
Microeconomics vs. Macroeconomics
- Microeconomics is the study of how households and firms make decisions and how they interact in ______ markets - Macroeconomics is the study of _____ phenomena
Scientific Method
- Using abstract models to help explain how a complex, real world operates - Developing theories, collecting, and analyzing data to assess theories
Two markets
1. the market for goods and services 2. the market for "factors of production"
Positive vs. Normative Economics
Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved. - A Positive statement is an assertion of fact - A normative statement is when we make a valued-judgment
Assumptions
Simplify the complex world and make it easier to understand Example: to study international trade, assume two countries and two goods
Scarcity
the limited nature of society's resources
Tradeoffs
Because resources are scarce individuals face tradeoffs
Opportunity cost
The opportunity cost of an action/decision is what we give up as a consequence of that action/decision
The Circular-Flow Diagram
a visual model of the economy, shows how dollars flow through markets among households and firms
production possibilities frontier
the production possibilities frontier, is a graph showing the various combinations of _____ that can be produced when all resources are being utilized in the most _______ manner possible, given the current level of ________.
Factors of production:
the resources the economy uses to produce goods & services, including - ______ - ______ - ______ (buildings & machines used in production)
Economics
the study of how society manages its scarce resources
Economists use models because
the world is too complex to fully and comprehensively consider at one time.