principles of econ unit 1

production possibilities frontier:

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

what is an example of marginal analysis?

a hungry person decides whether to eat one more slice of pizza

in terms of the production possibility frontier, inefficient use of available resources is shown by

a point located inside the production possibility frontier

market failure

a situation in which a market left on its own fails to allocate resources effectively

marginal change

a small incremental adjustment to a plan of action

economics

a social science that studies how people make choices under conditions of scarcity and the results of those choices for society

what would be an example of macroeconomics?

a study of recessions

circular flow diagram:

a visual model of the economy that shows how dollars flow through markets among households and firms

business cycle

fluctuations in economic activity such as unemployment and production

economic models are intended to

generalize about patterns in decision-making

imports

goods that are produced abroad and sold domestically

exports

goods that are produced domestically and sold abroad

if a production possibility frontier is a straight line, it tells us that the opportunity cost of producing one more unit of good X;

is a constant amount of good Y

a normative statement is one that

is based on value of judgements

when moving along a PPF, the opportunity cost to society of getting more of one good

is measured by the amount of the other good that must be given up

economic models claim to be a

reasonable abstraction of how people make choices, highlighting the most important factors

macroeconomics:

the study of the behavior of an economy as a whole, including inflation, unemployment, and economic growth.

microeconomics:

the study of the behavior or an individual, firm, or organization, or the behavior of groups in a single market. deals with one good within the economy

what is an example of a positive statement?

the temperature is 92 degrees today

opportunity cost is

the value of the best alternative forgone in making any choice

what are the 3 principles of how the economy as a whole works?

1. a country's standard of living depends on its ability to produce goods and services 2. prices rise when the government prints too much money 3. society faces a short run trade off between inflation and unemployment

what are the 4 principles of how people make decisions?

1. people face trade offs 2. the cost of something is what you give up to get it 3. rational people think at the margin 4. people respond to incentives

what are the 3 principles of how people interact?

1. trade can make everyone better off 2. markets are usually a good way to organize economic activity 3. governments can sometimes improve market outcome

microeconomics is concerned with

a detailed examination of specific economic units that make up the economic system

economists usually make the assumption that production is subject to increasing oppurtunity costs because:

all resources are not equally suited to producing every good

the problem of scarcity is confronted by

all societies

economic surplus

also known as net benefit; the benefit of taking the action minus the cost

any issue that involves choices under scarcity is what kind of issue?

an economic issue

market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

inflation

an increase in the overall level of prices in the economy

cost-benefit principle

an individual (or firm or a society) should take action if, and only if, the extra benefit from taking the action are at least as great as the extra costs

the effect of an increase in productive inputs such as labor and capital can be shown by

an outward expansion of the PPF

Barry owns a clothing store in the mall and has asked two economic consultants to develop models of consumer behavior that he can use to increase sales. Barry should choose the model that

assumes that consumers apply the cost-benefit principle

a choice made _____ is a choice whether to do a little more or a little less of something

at the margin

if resources are "scarce" it means that they

cannot provide enough goods or services to satisfy all human material wants and needs

positive statements:

claims that attempt to describe the world as it is; testable by facts

normative statements:

claims that attempt to prescribe how the world should be; typically a judgement or opinion

marginal analysis

comparing the costs and benefits of doing a little bit more of an activity

marginal analysis refers to

decisions about whether to do a bit more or a bit less of an activity, helps when making a "how much" choice and involves trade-offs

you should decide to go to a movie

if the marginal benefit of the movie exceeds its marginal costs

microeconomics deals with

individual units in the economy

scarce

limited nature of society's resources

which branch of economics is most likely to study differences in countries' growth rates

macroeconomics

which branch of economics is most likely to study differences in countries' growth rates?

macroeconomics

the problems of aggregate inflation and unemployment are

major topics of macroeconomics

in constructing models, economists

make simplifying assumptions

in construction models, economists

make simplifying assumptions

the concept of the margin deals with

making incremental choices

your neighbor is mowing her yard one afternoon when she stops to have some lemonade. she drinks one glass and is considering having a second glass. this is an example of

marginal analysis

what 2 subfields is economics divided into?

microeconomics and macroeconomics

the slope of a typical PPF is

negative

one thing that distinguishes normative principles from positive principles is that

normative principles tell us how people should make economic decisions, and positive principles tell us how people actually do make decisions

scarcity in economics means

not having sufficient resources to produce all the goods and services we want

a central assumption in economics is that

people have to make choices because they can't have or do everything

a key fundamental to all economics is

people have unlimited wants and face limited means to satisfy them

a key theme fundamental to all of economics is

people have unlimited wants and face limited means to satisfy them

grades are low in class and your professor makes available a 10-point extra credit assignment. Most o the students turn in the assignment. This statement best represents the economic concept of

people usually exploit opportunities to make themselves better off

rational people

people who systematically and purposefully do the best they can to achieve their objectives given the available opportunities

"economics is concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity." This statement is

positive but correct

"macroeconomics is the part of economics concerned with individual units such as a person, a household, a firm, or an industry." This statement is

positive but incorrect

what are the two types of statements about the world in economics

positive statements and normative statements

we are forced to make choices because of

scarcity

when we are forced to make choices we are facing the concept of

scarcity

model

simplified description that captures the elements of a situation and allows us to analyze them in a logical way; something that duplicates reality and does NOT represent it

incentive

something that induces another person to act; plays a central role in the study of economics

what do economists generally assume about people?

that they are self-interested and rational

market power

the ability of a single person or firm to unduly influence market prices

productions possibilities frontier

the ability of an economy to produce greater level output represented by an outward shift of its production possibilities frontier

property rights

the ability of an individual to own and exercise control over scarce resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer (gives up less of something to produce a good)

absolute advantage

the ability to produce a good using fewer inputs than another produce (deals with time)

what does the behavior of the economy reflect?

the behavior of the individuals who make up the economy

whenever a choice is made

the cost of that choice could be referred to as opportunity cost

opportunity costs exist because

the decision to engage in one activity means forgoing some other activity

externality

the impact of one person's actions on the well being of a bystander

the economy's factors of production are not equally suitable for producing different types of goods. this principle generates

the law of increasing opportunity cost

the production possibilities frontier illustrates

the maximum quantity of one good that can be produced given the quantity of the other good produced

the primary emphasis in macroeconomics is on

the national economy

if the PPF were a straight line sloping down from left to right, this would suggest that

the opportunity costs of the products are constant

if the production possibility frontier were a straight line sloping down from left to right, this would suggest that

the opportunity costs of the products are constant

suppose that Indiana produces only steel and corn with fixed amounts of land, labor, and capital resources. which of the following best reflects the potential for economic growth of the Indiana economy

the percentage of Indiana residents with a college degree rises from 25% to 30%

what is an example of a microeconomic statement

the price of personal computers declined 4.7 percent last year

equality

the property of distributing economic prosperity uniformly among the members of society

efficiency

the property of society getting the most it an from its scarce resources

productivity

the quantity of goods and services produced from each unit of labor input

macroeconomics deals with

the working of the entire economy or large sectors of it

economists use abstract models because

they are useful for describing general patterns of behavior

what concept most closely relates to the idea of opportunity costs

trade-offs

true or false: using marginal analysis to decide whether to consume an additional slice of pizza requires making a comparison of the benefits and costs associated with the consumption of an additional slice of pizza

true

the models the economists construct

usually make simplifying assumptions

the opportunity cost of something is

what is given up to acquire it

for a economist, the cost of something is

what you gave up to get it

what would not be a part of microeconomics?

whether the federal budget should always be balanced