Chapter 1 Limits, Alternatives, and Choices

Economics assumes that human behavior reflects "_____________________"

"Rational Self-Interest

Economic Principle

**A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions. **Combinations of such laws/principles are incorporoated into models, which are simplified representations of how something works, such as a market or segment of the economy

Economic Growth

**An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technonogy **An increase of real output (gross domestic product) or real output per capita

Normative Economics

**Economic Policy **Incorporates value judgements about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal. **Subjective feelings about what out to be

Macroeconomics

**Examines the performance and behavior of the economy as a whole. Focuses its attention on economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as the government, household, and business sectors. **Seeks to to obtain an overview, or general outline, of the structure of the economy and the relationhips of its major aggregates. Total output, total employment, total income, aggregate expenditures, and the general level of prices in analyzing various economic problems. "The beach"

Positive economics

**Focuses on facts and cause-and-effect relationhips. ** Includes description, theory development, and theory testing. ** Avoids value judgements. **Deals with what the economy is actually like **What is

Land

**Includes all natural resources ("gifts of nature") used in the production process. **Forests, mineral and oil deposits, water resources, wind power, sunlight, and arable land

Scientific Method (2)

**Observing real-world behavior and outcomes **Based on those observations, formulating a possible explanation of cause and effect (hypothesis) **Testing this explanation by comparing the outcomes of specific events to the outcome predicted by the hypothesis **Accepting, rejecting, and modifying the hypothesis, based on these comparisons. **Continuing to test the hypothesis against the facts. If favorable results accumulate, they hypothesis evolves into a theory. A very well-tested and widely accepted theory is referred to as an economic law, or principle

Investment

**Spending that pays for the production and accumulation of capital goods **Captial goods satisfy wants indirectly by helping to produce consumer goods.

Income Changes

**The location of the budget line varies with money income. ** An increase in money income shifts the budget line to the right ** A decrease in money income shifts it to the left

Aggregate

A collection of specific economic units treated as if they were one unit.

Production Possibilities Curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technonogy are fixed.

Economic Perspective

A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions. Focuses largely on marginal analysis.

Unattainable

All combinations beyond the budget line

Attainable

All combinations of two goods on or inside the budget line

Capital

All manufactured aids used in producing consumer goods and services.

Budget Line

Can clarify the economizing problem. A line that shows the different combinations of two products a consumer can purchase with a specific money income, give the products' prices.

Labor

Consists of the physical actions and mental activities that people contribute to the production of goods and services.

Generalizations

Economic principles are generalizaions relating to economic behavior or to the economy itself

Scarcity

Economic resources needed to make goods and services are in limited supply The limits placed on the amounts and types of goods and services available for consumption as the result of there being only limited economic resources from which to produce output; the fundamental economic constraint that creates opportunity costs and that necessitates the use of marginal analysis (cost-benefit analysis) to make optimal choices.

Other-things-equal assumption

Economists use the ceteris paribus or other-things-equal assumption - the assumption that factors other than those being considered do not change. They assume that all variables except those under immediate consideration are held constant for a particular analysis.

Entrepreneurs

Individuals who provide entrepreneurial ability to firms by setting strategy advancing innovations, and bearing the financial risk if thier firms do poorly.

Choice

Limited income forces people to choose what to buy and what to forgo to fulfill wants.

Graphical expression

Many economic models are expressed graphically

Economize

Pick and choose goods and services that maximize our satisfaction gien the limitations we face.

Consumer Goods

Products and services that satisfy human wants directly

Consumers, business firms, and governments are "__________" when making "____________"

Purposeful; desicions

Economic Resources

The Land, Labor, Capital, and Entrepreneurial ability that are used to produce goods and services; the facotrs of production.

Opportunity Costs

The amount of other products that must be forgone or sacrificed to produce a unit of a product

Marginal Analysis

The comparison of marginal ("extra" or "additional" or "a change in") benefits and marginal costs, usually for decision making. Most choices or decisions involve changes in the status quo.

Factors of Production

The four econoimc resources: Land, Labor, Captical, and Entrepreneurial ability

Entrepreneurial Ability

The human resource that combines the other economic resources of land, labor, and capital to produce new products or make innovations in the production of existing products; provided by entrepreneurs.

Economizing Problem

The need to make choices because economic wants exceed economic means. **Limited Income **Unlimited Wants

Microeconomics

The part of economics concerned with decision making by individual customers, workers, households, and business firms. "The sand, rocks, and shells"

Utility

The pleasure, happiness, or satisfaction obtained from consuming a good or service. People allocate their time, energy, and money to maximize their satisfaction. Because they weigh costs and benefits, their economic decisions are "purposeful" or rational", not "random" or "chaotic".

Law of Increasing Opportunity Costs

The principle that as the produciton of a good increases, the opportunity cost of producing an additional unit rises.

Scientific Method (1)

The procedure for the systematic pursuit of knowledge involving the the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws.

Economics

The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity

Self-interested behavior is

behavior designed to increase personal satisfaction, however it may be derived.

Increasing one's own wage, rent, interest, or profit normally requires...

identifying and satisfying somebody else's wants.

Society...

must also make choices under conditions of scarcity.

Individuals look for and pursue opportunities to increase their _______.

utility