Unit 1 - Scarcity, Choice, Opportunity Cost

10) Society faces a short-run trade-off between inflation and unemployment

1) to increase amount of money the economy wants to spend more, this creates higher demand 2) increase demand-firms raise prices, economy wants to spend more goods and services 3) more hiring = less unemployment

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Costs

An amount that must be paid or spent to buy or obtain something. The effort, loss or sacrifice necessary to achieve or obtain something.

Tradeoff

An exchange- giving up one thing to get something else.

Define and explain the occurrence of the law of increasing marginal opportunity cost

As you continue to increase production of one good, the opportunity cost of producing the next unit increases. This is because the more you produce of one item, less resources are left to produce another.

How does opportunity cost, scarcity, and tradeoffs relate to each other

Because of scarcity, people or countries need to choose what to produce because everything has an opportunity cost. By doing this, we make tradoffs, choosing to produce one thing over another.

4. People respond to incentives

Behavior changes when costs or benefits change.

2. The cost of something is what you give up to get it

Compare costs and advantages, not just talking about money, but also opportunity costs

why is it almost always beneficial to trade

If countries trade, they will get the specialization of one product and another for less resources. Both countries could specialize in whatever they have a lower opportunity cost of producing, and will benefit from it.

Scarcity

Limited quantities of resources to meet unlimited wants

7. Governments can sometimes improve market outcomes

Markets are guided by the invisible hand but it is necessary to have some gov. law. This helps keep things regulated such as making sure there aren't monopolies to make sure there is competition. Gov. also helps promote efficiency and equality.

5. Trade can make everyone better off

Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods

allocation efficiency def and what it look like on a ppf

Society wants something, so you produce it. Every good or service is produced to the point where the last unit provides a marginal benefit to consumers - in the picture, it is points A B and C

why does "the economic way of thinking" focus on marginal cost and ignore sunk cost

The economist way of thinking is thinking and acting in predictable ways. Smart people think on the margin, what will benefit them at the moment, but also in the future. They ignore sunk costs because they are done and cannot be changed.

8. A country's standard of living depends on its ability to produce goods and services

The more productive a country is, the more successful. More products means better living standard

normative economics def. and example

makes predictions about the way the economy should work (ideas/opinions) "Based on past data, big tax cuts would help many people, but government budget constraints make that option unfeasible."

Mixed economy

mix between market and command economy. a mix of privately owned businesses and gov. owned businesses

Labor

people

economics

The study of how people seek to satisfy their wants by making choices

9. prices go up when the gov. prints too much money

This is an inflation. The goal is to keep inflation down. Inflation - increase in overall level of prices in the economy

name 5 different allocation mechanisms or rationing mechanisms

price, age, who you know (connections), waiting time, and people willing to wait for goods

Traditional economy

produce products and services based on beliefs, traditions, customs, religion, etc.

productive efficiency def and relation on ppf

producing as many products as possible. maximizing outputs by using all of your resources - the whole ppf

Three basic economic questions

What to produce? How to produce? For whom to produce?

what are the three economic questions and why all economic systems must answer the questions

What to produce? How to produce? For whom to produce? If you can produce something most efficiently

private property relevance to economics

property owned by individuals or companies, not by the government or the people as a whole. This is relevant to economics because they are able to act on their own and produce goods and services based on wants to please citizens.

pros and cons of free trade

pros:efficiency, growth cons: dependence, job loss (outsourcing), less control

sunk cost

a cost that has already been committed and cannot be recovered

entrepreneurial ability

a person who is able to tolerate risks, and also able to sleep at night

Ceteris Paribus

all other things remain constant

land

all resources on in or above the land

Why does the PPF bow outward?

because some resources are more suited to the production of one good or another (the law of increasing opportunity cost)

Command economy

controlled by a central power, usually a government

economic and socioeconomic goals - what they are and how they inflict

economic goals - efficiency, equity, economic freedom, full employment, economic growth, security, and stability. socioeconomic goals - welfare, tradition, and religion

controlled economy

gov. controls the industries and decide what goods should be produced and the amounts. Attempts to own important resources and decide what needs to be produced and consumed.

Market economy

gov. doesn't control important resources, valuable goods, or major segment of the economy. organizations are run by the people. People determine the economy pretty much depending on the supply and demand

trade barriers

government-imposed regulations that increase the cost and restrict the number of imported goods

3. Rational people think at the margin

i. "Thinking marginally" --> think in increments ii. Weighs the marginal benefits vs. the marginal costs 1) MB > MC --> "keep pedaling" 2) MB < MC --> "pedal backwards" 3) MB = MC --> "stop pedaling"

1. People face trade-offs

i. To get more of one thing, you must get less of another ii. Efficiency vs. Equity EX: Guns vs Butter. If a society wants gun for defenses, they have less money for consumer goods (butter) to raise the standard of living at home.

perverse incentives

reward structures that lead to suboptimal outcomes by stimulating counterproductive behavior. examples: In Hanoi, under French colonial rule, a program paying people a bounty for each rat tail handed in was intended to exterminate rats. Instead, it led to the farming of rats

what is the meaning of a ppf that would bow inward

something makes it harder to produce both goods at the same time than producing just one or the other. (law of decreasing opportunity cost)

Straight line PPF verse a bowed outward ppf

straight line: represents constant opportunity costs: increased production of one good comes at a constant opportunity cost outward bow: some resources are suited more for the production of one good over another. Not all resources are equal

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

art of economics

the application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics

positive economics def. and example

the branch of economic analysis that describes the way the economy actually works (facts) "We should cut taxes in half to increase disposable income levels."

marginal cost

the cost of producing one more unit of a good

fallacy of composition

the error of assuming that what is true of a member of a group is true for the group as a whole

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Capital

the tools, equipment, machinery, and factories used in the production of goods and services

6. Markets are usually a good way to organize economic activity

they are ran by the invisble hand: The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand.

generalized growth of a ppf and example of how this could happen

this is an increased output, pushing the entire frontier outward. This could happen from increased outputs, advanced technology, change in law or regulation, investing in labor resources, and increase productivity.