Microeconomics Chapter 1: Limits, Alternatives, and Choices

the budget line illustrates

1. attainable and unattainable points, 2. trade offs and opportunity costs 3. limited incomes and positive prices, and 4. income change budget line shifts

what are the 4 functions of an entrepreneur with entrepreneurial ability?

1combines resources needed for production 2 make basic business policy decisions 3 innovator for new products, production techniques, organizational forms 4 bears the risk of time, efforts, and funds

in fig. 1.3 we see that the optimal amount of pizza is

200,000 units/ when marginal benefits cover marginal cost

what are the 4 factors of production?

Land, Labor, Capital, and Entrepreneurial ability

When is it advantageous for society to produce an additional product to consume?

When the marginal benefit of consuming the product is higher than the additional cost of the product.

what is the Post hoc fallacy

a causation fallacy when two events occur in sequence the first event is not always the cause of the 2nd event

the location of a budget line depends on

a consumer's money income and the prices of the two products under analysis

opportunity costs are always present whenever...

a decision is made

if economics was a beach macroeconomics would be

a general overview of the entire beach (no specifics like sand, rock, and shells)

a production possibilities curve is

a graphical representation of choices

a growing economy results in

a larger total output and an outward shift of the production possibilities curve PPC

a budget line is

a schedule or curve that shows the various combinations of two products a consumer can purchase with a specific money income

what is entrepreneurial ability?

a special kind of human resource supplied by entrepreneurs

positive economics describes the economy as it

actually is , it avoids value judgments and attempts to establish scientific statements about economic behavior

what are factors of production?

all natural, human, and manufactured resources used to produce goods and services

imperfect info about a fast food line may result in...

an unexpected wait or some people leaving when they see a long line

capital goods

are used to produce consumer goods to indirectly satisfy wants

points inside the budget line represent

attainable purchases given relevant income and prices

a third factor may

be the cause in a correlation causation fallacy

why do fast food lines tend to have equal lengths?

because people shift from longer to shorter lines in an effort to save time

wants include

both necessities and luxuries (economists don't care)

products that are promoted as "free" may actually be

bundled with another good for which the consumer must pay; because a purchase is required to obtain them these products are not really free to the buyer

synonym for "other things equal"

ceteris paribus

scarcity requires that ...

choices be made

limited incomes and positive prices force people to

choose (tells what they can choose not what they will choose)

the combination of limited income and unlimited wants force us to

choose certain goods and services that would maximize our utility

marginal analysis

comparison of benefits and costs usually for decision making

the negative slope of a budget line represents that

consumers must make trade offs in their consumption decisions

most decisions concern a change in

current conditions such as benefits and costs (marginal analysis)

production possibilities tables and curves are

devices used to illustrate and clarify society's economizing problem

different preferences and circumstances (including errors) lead to...

different choices

consumer goods

directly satisfy wants

when a customer reaches the counter

economic decisions/choices on what to order are made based on a comparison between costs and benefits of possible choices

generalization in economics

economic principles are expressed as tendencies of the typical or average consumer, worker, or business firm

the economic rational for the the steepness of the curve/ increasing opportunity costs is that

economic resources are not completely adaptable to alternative uses ( a pizza maker will struggle to make robots and vice versa)

economists use the scientific theory to...

establish theories, laws, and principles

what is the correlation vs causation fallacy

events may be related without a causal relationship

limited income

everyone even the most wealthy has a finite amount of money to spend

the marginal cost of an action should not

exceed its marginal benefits

principles are used to

explain and/or predict the behavior of individuals and institutions

for Gates, Winfrey and Rodriguez the opportunity cost of college was

extremely high because they would not be able to make money while going to and paying for college

synonym for economic resources

factors of production

what are the 4 assumptions made by PPCs (production possibilities curves)

full employment, fixed quality and quantity of resources at this time, technology is constant during analysis, and the economy produces only 2 types of products

the college decision requires weighing...

future benefits (earnings) against cost (direct costs: tuition and indirect costs: foregone wages)

the budget line model assumes two goods but...

generalizes to all goods available to consumers

what two things satisfy wants

goods and services

in general those attending and completing college will earn

greater lifetime earnings than those holding only high school diplomas

specialization and trade have the same effect as

having more and better resources of improved technology

what is labor?

human resources which include physical and mental abilities used in production

define the ceteris paribus assumption

in order to judge the effect one variable has upon another it is necessary to hold other contributing factors constant

opportunity costs are measured

in real terms rather than money

how is utility measured ?

in utils

what are the three main reasons for economic growth?

increases in quantity of resources, improvements in quality of resources, advances in technology employed in production or distribution

the slope of the PPC (production possibilities curve) becomes steeper (bowed out and concave origin) to demonstrate

increasing opportunity costs

what is capital?

investment goods which are all manufactured aids to production like tools, equipment, factories, transportation, etc.

principles, laws, theories, and models are used

like synonyms with custom or convenience governing the choice in each particular case

the means to satisfy a human's wants are

limited

rational self-interest entails

making decisions to achieve maximum utility

the economic perspective is largely focused on ...

marginal analysis

companies provide "free" goods as a

marketing strategy to promote brand awareness

marginal costs rise as

more of a product is produced fig 1.3

what is land?

natural resources or gifts of nature

advantage of natural scientists vs economists

natural scientists can precisely test using using controlled laboratory experiments but economists must test their theories using the real world

most disagreements among economists involve

normative value based questions

products that are provided for free to an individual are not free...

not free for society because of the required use of scarce resources

the scientific method consists of ...(5 things)

observation of facts/real data, hypotheses, hypothesis testing, reviewing the hypothesis, and continued testing (to become a theory, law, principle, or model)

cattle rancher composition fallacy

one individual cattle rancher gets a lot of money per cattle sold but the prices of cattle fall as more ranchers sell cattle

resources can only be used for

one purpose at a time

example of the composition fallacy

one stockholder sales of share leads to wealth but a large number of stockholders selling large number of shares leads to less wealth

greater income will shift the budget line

out and to the right which allows consumers to purchase more of both goods

unlimited wants

people's wants are virtually unlimited

what are biases?

preconceptions that are not based on facts

the slope of the graphed budget line is the ratio of the

price of the good measured on the horizontal axis (Pb) / price of the goods measured on the vertical axis (Pdvd)

whether the economic decision is personal or made by a business or government the ...

principle of marginal analysis is the same

many economic relationships can be demonstrated...

quantitatively with graphs and key graphs

Choices will be necessary because

resources and technology are fixed (table 1.1)

increasing income lessens

scarcity (but does not eliminate it)

rational self interest is not the same as...

selfishness

income changes will

shift the budget line

economics

social sciences concerned with how individuals, institutions, and society make optimal/best choices under conditions of scarcity.

the optimal point depends on

society and is a normative decision

in fig 1.3 marginal benefits decline as

society consumes more pizza

microeconomics looks at

specific economic units

principles, laws, theories, and models are

terminology/terms that refer to generalizations about economic behavior

what is loaded terminology?

terms that contain prejudice and value judgments of others

beyond 200,000 units/ the optimal ...

the added benefits would be less than the added costs (bad)

at less than 200,000 units...

the added benefits would exceed the added costs (so you need to make more pizza)

the opportunity cost is

the amount of other products that must be forgone to obtain more of any given product

What is the optimal?

the best product mix on some point on the curve

opportunity costs

the cost of any good service or activity is the value of what must be given up to obtain it ie. the value of the next best thing foregone

What is optimal allocation?

the decision of society to use a specific optimal point on the PPC

what determines if we have more or less economic growth in the future?

the decisions on how to allocate resources in the present

scarcity

the economic resources needed to make goods and services are in limited supply

macroeconomics examines

the economy as a whole

full employment means

the economy is employing all available resources

if economics was a beach microeconomics would be

the examination of sands, rocks, and shells (not the beach

a hypothesis is

the formulation of cause and effect relationships based on facts

microeconomics is concerned with

the individual industry, firm, or household and the price of specific products and resources

the optimal production of any item is where

the marginal benefit is equal to its marginal cost (7000 robots in fig 1.3)

each option considered weighs

the marginal benefit to the marginal cost

points on the curve of a PPC represent

the maximum possible combinations of the two products (pizza and robots)

the law of increasing opportunity cost says

the more of a product produced the greater is its (marginal) opportunity cost

the value of the slope measures precisely

the opportunity cost of one or more units of a good under analysis

utility

the pleasure happiness or satisfaction obtained from consuming a good or service

utility is

the pleasure or satisfaction obtained from consuming a good or service

market prices are not part of

the production possibilities model

individuals are confronted with the need to make choices because

their wants exceed their means to satisfy them

what are purposeful simplifications

theories, principles, and models

a common economic lunch expression

there is no free lunch

how can a nation avoid the output limits of its domestic production possibilities?

through international specialization and trade

why do people choose the shortest line?

to reduce time cost

macroeconomics includes the measures of

total output, total employment, total income, aggregate expenditures, and general price level

points outside the curve are

unattainable at present

points outside the budget line represent

unattainable purchases with given income and prices

points inside the curve represent

underemployment or unemployment

Human wants are ...

unlimited

what is a choice for future over present consumption?

using resources to invest in technological advances, education, and capital goods

what is a choice for present over future consumption?

using resources to produce consumer goods and services

normative economics involves

value judgments about what the economy should be like and the desirability of the policy options available

economic resources are limited relative to

wants

do wants stay the same?

wants change especially as new products are introduced

what is the fallacy of composition

what is true for one individual or part of a whole is true for a group of individuals or the whole

when does unemployment occur

when the economy is producing less than full employment or inside the curve (point U in fig 1.4)

When is it not worth it for society to produce an additional product to consume?

when the marginal cost of obtaining an additional product is more than the additional benefit received

a positive relationship between education and income does not tell us

which causes the increase in the other ( or which is independent or dependent)

a change in the price of one of the goods

will change the slope of the budget line and change the purchasing power of the consumer

the cost of obtaining more info about a fast food line is not...

worth the benefit