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