All individuals and societies face scarcityScarcity: a situation in which unlimited wants exceed the limited resources available to fulfill those wantsWants> resourcesBecause we live in a world scarcity, when we choose something, we must give up something else. In other words, every choice has an opportunity cost.Opportunity cost: the highest-valued alternate that must be given up to engage in an activity (the best 2nd choice)Economics is the study of choices people make to attain their goals given their scarce resourcesOne important part of economics is the analysis of incentives, which is one of the factors that motivate people to make a particular choicePublic policy may rely on incentives to change people’s behavior, and it may lead to unintended consequences if it inadvertently changes incentives.Incentives also play a role in various economic models.Economic models: simplified versions of reality used to analyze real-world economic situations.Economists (& other scientists) make unrealistic assumptions when they build models in order to simplify our complicated world enough that they can understand and analyze problems and accurately answer questionsMacro Econ: Chapter 1, Foundation & Models 01/23/2015All individuals and societies face scarcity -Scarcity: a situation in which unlimited wants exceed the limited resources available to fulfill those wants oWants> resources Because we live in a world scarcity, when we choose something, we must give up something else. In other words, every choice has an opportunity cost. -Opportunity cost: the highest-valued alternate that must be given up to engage in an activity (the best 2nd choice) Economics is the study of choices people make to attain their goals given their scarce resources -One important part of economics is the analysis of incentives, whichis one of the factors that motivate people to make a particular choice Public policy may rely on incentives to change people’s behavior, and itmay lead to unintended consequences if it inadvertently changes incentives. Incentives also play a role in various economic models. -Economic models: simplified versions of reality used to analyze real-world economic situations. Economists (& other scientists) make unrealistic assumptions when they build models in order to simplify our complicated world enough that they can understand and analyze problems and accurately answer