CH.1 - LIMITS, ALTERNATIVES, CHOICES
THE PRODUCTION POSSIBILITIES CURVE
*a graph that shows alternative ways to use an economy's productive resources* •Producing anywhere along the blue PPC line means that the economy is producing the maximum amount of pizzas and robots, and this implies that the economy is efficient. •The economy can produce at any point inside the PPC, but doing so means that the economy is inefficient. This means that the economy has idle resources and/or resources are not being used to their capacity. When inside the PPC, it is possible to produce more of both goods by utilizing idle resources, or using resources to their capacity. •Just like with the budget line, any point to the right of the PPC represents a combination of robots and pizzas that is impossible to create with the current resources.
EQUATION OF A LINEAR RELATIONSHIP
*y = a + bx*, where •y is the dependent variable •a is the vertical intercept •b is the slope of the line •x is the independent variable
WHAT is a budget line?
- A budget line is used to illustrate the greatest combinations of two goods that can be purchased with a certain amount of income. - It reflects the greatest amount of these two goods that can be purchased. - A budget line is created for a specific level of income so that when income changes, the budget line will shift to show the higher or lower incomes.
LAW OF INCREASING OPPORTUNITY COSTS
- As more of a particular good is produced, its marginal opportunity costs increase - Production possibilities curve: •Concave shape - Economic rationale
FUNCTIONS OF ENTREPRENEURS
- Employ the other factors of production. - Take initiative. - Make strategic business decisions. - Innovate. - Take risk
WHAT is an example of marginal analysis?
- Every time we make a choice, we are weighing the marginal benefit and cost. - We will choose to do something if the marginal benefit is greater than the marginal cost because that is rational and will help to maximize utility. - When people say, "That's not worth it," then they are saying the marginal cost is greater than the marginal benefit.
ECONOMIC PRINCIPLES
- Generalizations - Other-things-equal assumption: The assumption that factors other than those being considered did not change. (Also called the "ceteris paribus assumption.") - Graphical expression EX. •Economic principles are generalizations about economic behavior that are true for the average person. •The other-things-equal assumption is the ceteris paribus assumption which means that all variables other than those under consideration are held constant or is assumed to not change for a particular analysis. In economics, graphs are often used to illustrate the relationship between variables.
EXAMPLE of productive capacity
- If wants didn't exceed our productive capacity, everyone could have everything that they ever wanted and this class wouldn't exist. - Since we can't get everything that we want, we have to make choices. - The choices that we make are the best options available given the circumstances. - Every choice that is made involves an economic decision. - Your having chosen to be in this class right now impacts the economy. - If you were not here, you could be working and helping to produce economic activity.
WHAT does the scientific method consist of?
- Observe. - Formulate a hypothesis. - Test the hypothesis. - Accept, reject, or modify the hypothesis. - Continue to test the hypothesis, if necessary.
WHAT is the difference between normative and positive economics?
- Positive economics can be supported or disproved with data. There isn't any subjectivity. - Normative economics is what "ought to be." This is subjective since people have different opinions about what is desirable.
PURPOSEFUL BEHAVIOR
- Rational self-interest. - Individuals and utility. - Firms and profit. - Desired outcome. EX. •Individuals and businesses make rational decisions; decisions that will make them better off, not worse off. •With rational self-interest, the goal is to maximize utility or satisfaction. This does not mean that we are completely selfish or that we can't make wrong decisions. We can derive utility by helping others and often when we make decisions, we don't have all of the information, so wrong decisions can be made. •Firms are rational when they make choices about which products to produce in an attempt to maximize their profits. •People make decisions with some desired outcome in mind.
SCARCITY AND CHOICE
- Resources are scarce. - Choices must be made. - Opportunity cost. - There is no free lunch. EX. •If resources weren't scarce, we wouldn't have to make choices. •Because we have to make choices, there is a cost to every choice and that's called "opportunity cost." This is where the phrase "There's no such thing as a free lunch" comes from. •What did you give up to be in this class? What would you be doing if you weren't in class right now? •It's important to note that everyone's opportunity cost will be different.
SLOPE OF A NONLINEAR CURVE
- Slope always changes. - Use a line tangent to the curve to find slope at that point. - When calculating the slope of a nonlinear curve, the slope is always changing. - This means the slope will be different at every point on the curve. - In this case to find the slope, you must draw a line tangent to the curve and calculate the slope of the line by finding the change between two points along the tangent line.
INTERNATIONAL TRADE
- Specialization - Increased production possibilities
DETERMINING SLOPS OF CURVES
- The slopes of a nonlinear curve will change along the curve. - Here, the slope at these two points on the curve will be different from each other. - To find the slope of a nonlinear curve, draw a straight line tangent to the curve and find the slope of that line by dividing the vertical change by the horizontal change of that line.
The economy decides how much pizza to produce similarly to how a person makes decisions. The economy must compare....
- must compare the marginal benefit to the marginal cost of producing pizza. - The optimal amount of pizza is where the marginal benefit is equal to the marginal cost of producing another unit of pizza.
CAPITAL (INVESTMENT)
- refers to anything man-made and used to produce goods and services. (ex. storage buildings, machinery, etc.) - Capital is an investment good; it is not the same as money. Money isn't even considered a resource.
ENTREPRENEURIAL ABILITY
- the imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss - Entrepreneurs are another type of human resource, but is different from labor mainly because entrepreneurs are risk-takers.
MAXIMIZE UTILITY
- to select a course of action that will yield the outcome with the greatest benefits relative to costs - GOAL OF A CONSUMER
Four categories of economic resources:
1.Land: Includes all natural resources used in the production process. 2.Labor: Physical actions and mental activities that people contribute to production. 3.Capital (investment): All manufactured aids used in production. 4.Entrepreneurial ability: Special human resource distinct from labor.
THE ECONOMIC PERSPECTIVE
A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs.
GRAPH
A visual representation of the relationship between two variables
UTILITY
Ability or capacity of a good or service to be useful and give satisfaction to someone.
MARGINAL BENEFITS
Additional benefits; the benefits connected with consuming an additional unit of a good or undertaking one more unit of an activity.
PRODUCTION POSSIBILITIES MODEL
An economic model that shows different combinations of two goods that an economy can produce. Assumptions: •Full employment •Fixed resources •Fixed technology •Two goods 1.Consumer goods 2.Capital goods
DIRECT RELATIONSHIP
Both variables move in the same direction
CAPITAL GOODS
Buildings, machines, technology, and tools needed to produce goods and services.
The _______________________________ _______________________________________ is the way economists view the world. This includes considering scarcity of resources, the opportunity costs of economic decisions, and how consumers and businesses exhibit purposeful behavior in order to increase their utility.
ECONOMIC PERSPECTIVE - Often economists use marginal analysis, which involves weighing the marginal benefits and the marginal costs of some activity, in their work.
_________________________ _______________________ are generalizations about economic behavior that are true for the average person.
ECONOMIC PRINCIPLES
is a social science concerned with making optimal choices under conditions of scarcity
ECONOMICS - Economic wants exceed society's productive capacity.
_____________________________________ are the driving force behind production and the agent that combines the other factors of production or inputs in a business venture.
ENTREPRENEURS - They risk their time, effort, ability and money because not all ideas or new products will be profitable.
POSITIVE ECONOMICS
Economic statements that are factual.
NORMATIVE ECONOMICS
Economic statements that involve value judgments.
In economics, __________________________________ are often used to illustrate the relationship between variables.
GRAPHS
FUTURE GOODS
Goods for the future include goods like capital, education, and research and development. - When we produce those kinds of goods today, they don't do anything to satisfy needs and wants today, but they will help to better satisfy future wants and needs by enabling the economy to produce a greater amount of present goods in the future.
WHAT does a graph consist of?
Horizontal axis Vertical axis Independent variable Dependent variable Ceteris paribus
____________________________ ________________________ enables countries to specialize in the production of goods which they produce more efficiently than other countries.
INTERNATIONAL TRADE - With international trade, resources are allocated more efficiently, and it essentially is the equivalent of an increase in resources. - Now a country can not only use its own resources, but it can also take advantage of foreign resources through trade. - This leads to a rightward shift of the production possibilities curve.
THE ECONOMIZNG PROBLEM
Limited income and unlimited wants. The budget line •Attainable and unattainable combinations •Trade-offs and opportunity costs
In ______________________________________ the entire economy is examined.
MACROECONOMICS •Macroeconomics also looks at the basic groups in the economy such as all households, all businesses, all of the government, or the foreign sector. All goods and services produced in the economy, or the unemployment rate for the entire labor force, or the inflation rate are all macroeconomics topics.
The comparison of marginal benefits and marginal costs, usually for decision making.
MARGINAL ANALYSIS - Marginal means "extra" or "additional."
In ________________________________________ an individual consumer, household, or industry is examined.
MICROECONOMICS - Examining the price of a particular product or demand or supply of a particular product's market is studied in microeconomics.
Because we have to make choices, there is a cost to every choice and that's called "________________________________ ___________________________." This is where the phrase "There's no such thing as a free lunch" comes from.
OPPROTUNITY COST - What did you give up to be in this class? What would you be doing if you weren't in class right now? •It's important to note that everyone's opportunity cost will be different.
The ______________________ _____________________ _________________ (PPC) is concave because of the law increasing opportunity costs.
PRODUCTION POSSIBILITES CURVE - If the opportunity costs were constant, the PPC would be a straight line. - When the economy is efficient and operating on the PPC, the only way to get more of one good is to give up some of the other because all resources are already being utilized. - However, since the resources that are the most efficient and easiest to access will be used first, to produce more will require the use of resources that are not as efficient or as easy to obtain thereby driving up the cost of production meaning the opportunity cost will increase.
Where the economy chooses to produce on the __________________________ ___________________________________ ____________________ today largely determines the amount of economic growth that they will experience in the future.
PRODUCTION POSSIBILITIES CURVE (PPC) - Goods for the future include goods like capital, education, and research and development. When we produce those kinds of goods today, they don't do anything to satisfy needs and wants today, but they will help to better satisfy future wants and needs by enabling the economy to produce a greater amount of present goods in the future. - Present goods are goods that satisfy needs today and do nothing for us in the future; most of the goods that we buy are present goods.
The ____________________________ ___________________________ ____________________ is an economic model that shows different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and fixed technology.
PRODUCTION POSSIBILITIES MODEL - takes into consideration the below variables: •Full employment •Fixed resources •Fixed technology •Two goods 1.Consumer goods 2.Capital goods
Economic wants exceed society's _________________________ ___________________________
PRODUCTIVE CAPACITY
PRESENT GOODS
Present goods are goods that satisfy needs today and do nothing for us in the future; most of the goods that we buy are present goods.
Graphically, economic growth is shown as a shift to the ________________________ of the PPC.
RIGHT - Shifting the PPC to the right shows that more robots and pizzas can now be produced at every point on the PPC. - Points that used to be unattainable are now attainable. - This means that the economy can now have a higher standard of living.
The _____________________ ___________________________ is the procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation of testing hypotheses to obtain theories, principles, and laws.
SCIENTIFIC METHOD
Based on the __________________________ _____________________________, economic principles and theories are created.
SCIENTIFIC METHOD - Observing real world behavior, formulating a possible explanation or hypothesis, testing this, and deciding to accept, reject, or modify the explanation. - Continue to test the hypothesis against real-world facts until a conclusion is reached.
___________________________________________ has come a long way from its first neighborhood coffee shop in Seattle.
STARBUCKS - From that one store in 1971, they now boast over 14,000 outlets in the United States and an additional 14,000 abroad. - When Starbucks is considering opening a new store, it has to consider the marginal benefits against the marginal costs involved. - It takes a great deal of research to ensure that the stores add value to the company's bottom line. - It goes through the same type of analysis when considering which items to carry on the menu and which ones should be removed.
______________________________ became a massive international company by using marginal-benefit/marginal-cost analysis for key decisions
STARBUCKS - they achieved this by: 1.Ranking and Selecting New Locations 2.Determining Local Saturation 3.Setting the Menu
OPPROTUNITY COST
The cost of the next best use of your time or money when you choose to do one thing over another
OPTIMAL OUTPUT
The ideal combination of fixed and variable factors to produce the lowest average cost MB=MC
VERTICAL INTERCEPT
The point at which a line meets the vertical axis of a graph
FIXED TECHNOLOGY
The state of technolgy used to produce the goods is constant
MACROECONOMICS
The study of the entire economy or a major aggregate of the economy.
MICROECONOMICS
The study of the individual consumer, firm, or market.
INVERSE RELATIONSHIP
Variables move in opposite directions
CETERIS PARIBUS
a Latin phrase that means "all other things held constant"
MARGINAL ANALYSIS
analysis that involves comparing marginal benefits and marginal costs
The individual's economizing problem exists because....
because of the combination of a limited income and unlimited wants.
For the economy as a whole, the economizing problem exists because...
because resources are scarce. •Resources refers to inputs that are used in the production of other goods and services.
ECONOMIC WANTS
desires that can be satisfied by consuming a good, service or leisure activity
FULL EMPLOYMENT
employment level when there is no cyclical unemployment
ZERO SLOPE
horizontal line
LABOR
is the human resource and refers to all physical and mental talents used in the production of a good or service.
ECONOMIC NEEDS
needs concerned with making the best use of a consumer's time and money—as the consumer judges it.
CONSUMER GOODS
products and services that satisfy human wants directly *tangible items produced for personal use*
LAND
refers to all natural resources
Society's Economizing Problem
resources (inputs used to produce goods and services) are scarce - •For the economy as a whole, the economizing problem exists because resources are scarce. •Resources refers to inputs that are used in the production of other goods and services. •Land refers to all natural resources. •Labor is the human resource and refers to all physical and mental talents used in the production of a good or service. •Capital refers to anything man-made and used to produce goods and services. Capital is an investment good; it is not the same as money. Money isn't even considered a resource. •Entrepreneurs are another type of human resource, but is different from labor mainly because entrepreneurs are risk-takers.
A CONSUMERS BUDGET LINE
shows the consumption bundles available to a consumer who spends all of his or her income - Any combination of goods inside the budget line can be purchased, but that combination of goods is not representative of the maximum that could be purchased. - Since the blue budget line represents the maximum of goods that can be purchased, any point outside (to the right) of the budget line represents a combination whose price exceeds the available income and therefore can't be purchased. - A budget line clearly illustrates how much of one good must be sacrificed to get more of another good (opportunity costs). • If income increases, the budget line will shift to the right to show that now more books and movies can be purchased. - If income falls, the budget line shifts to the left to show that fewer books and movies can be purchased.
MARGINAL COSTS
the cost of producing one more unit of a good or service
SCARCITY
the limited nature of society's resources
PRODUCTIVE CAPACITY
the maximum output that an economy can produce without big increases in inflation
RATIONAL SELF-INTEREST
the means by which people choose the options that give them the greatest amount of satisfaction
FIXED RESOURCES
the quantity and quality of the factors of production are fixed
ECONOMICS
the study of how society manages its scarce resources
INFINITE SLOPE
vertical line
SLOPE ECONOMICS
y=mx+b
WHAT is the goal of rational self-interest?
• the goal is to maximize utility or satisfaction. - This does not mean that we are completely selfish or that we can't make wrong decisions. We can derive utility by helping others and often when we make decisions, we don't have all of the information, so wrong decisions can be made. •Firms are rational when they make choices about which products to produce in an attempt to maximize their profits. •People make decisions with some desired outcome in mind.
THE BUDGET LINE
•Attainable and unattainable combinations •Trade-offs and opportunity costs
WHAT are the resources that are scare in the economizing problem?
•For the economy as a whole, the economizing problem exists because resources are scarce. •Resources refers to inputs that are used in the production of other goods and services. •Land refers to all natural resources. •Labor is the human resource and refers to all physical and mental talents used in the production of a good or service. •Capital refers to anything man-made and used to produce goods and services. Capital is an investment good; it is not the same as money. Money isn't even considered a resource. •Entrepreneurs are another type of human resource, but is different from labor mainly because entrepreneurs are risk-takers.
EXAMPLE of purposeful behavior? (rational self-interest)
•Individuals and businesses make rational decisions; decisions that will make them better off, not worse off. •Firms are rational when they make choices about which products to produce in an attempt to maximize their profits. •People make decisions with some desired outcome in mind.
EXPLINATION of production possibilities curve
•Producing anywhere along the blue PPC line means that the economy is producing the maximum amount of pizzas and robots, and this implies that the economy is efficient. •The economy can produce at any point inside the PPC, but doing so means that the economy is inefficient. This means that the economy has idle resources and/or resources are not being used to their capacity. When inside the PPC, it is possible to produce more of both goods by utilizing idle resources, or using resources to their capacity. •Just like with the budget line, any point to the right of the PPC represents a combination of robots and pizzas that is impossible to create with the current resources.
WHAT DOES the economic perspective consider?
•Scarcity and choice •Opportunity cost •Purposeful behavior to increase utility •Marginal analysis
SLOPE
•Slopes and measurement units •Slopes and marginal analysis •Infinite and zero slopes
THE OTHER-THINGS-EQUAL ASSUMPTION (aka. ceteris paribus assumption)
•is the ceteris paribus assumption which means that all variables other than those under consideration are held constant or is assumed to not change for a particular analysis. *the assumption that factors other than those being considered do not change*