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 questionsJanuary 23, Friday lectureEconomists may engage in positive analysispositive analysis: anaylsis concerned with what is or normative analysisNormative analysis: analysis concerned with what ought to be.Positive statements are descriptive and can be evaluated as true or false using only data.For example, “after speeding cameras were installed on I-380, the average speed of motorists decreased.” (this may be true or false but there is data to prove either way)Normative statements are prescriptive and involve personal values, so they cannot be evaluated as true or false using only data.For example, “the government should remove the speeding cameras from I-380.”Mainly in this class we use positive statements with data and charts and facts. (General focus )Economics is studied on two levels: microeconomics and macroeconomics.Microeconomics: the study of households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.Economists use the tem household to refer to all individuals occupying a home, and they use the term firm to refer to a company or business that produces and sells goods and/or services; goods are tangible merchandise, such as bottles of shampoo, and services are activities like haircuts.Macroeconomics: the study of the economy as a whole including topics such as inflation, unemployment, and economic growth.Many economic situations have both a micro and macro aspect, and mice and macro are closely intertwined because changes in overall economy arise from the decisions of individual households and firms.Trade off: that idea that, because of scarcity, producing more of one good or service means producing less of another good or service.First model…Production possibilities frontier (PPF): a curve showing the maximum attainable combinations of two products that may be produced with available recourses and current technologyTechnology refers to the processes used to produce goods and services.The PPF is an economic model used to analyze the trade-offs and opportunity costs that individuals, firms and countries face when deciding hw to use their scarce resourcesCombinations outside the PPF are unattainable, given the available resources and current technologyCombinations inside or on the PPF are attainable give the available resources and technologyCombinations inside the PPF the PPF are inefficient because some resources are not being used (unemployment), so it is possible for the economy to produce more of one good without producing less of the other.Combinations on the PFF are efficient because the maximum output is being obtained from the available resources and current technology, so it is impossible for the economy to produce more of one good without producing less of the other. (trade off)January 25 LectureIn our PPF example (refer to the lecture chapter example), Hodar can use all its available resources and current technology to produce either 200 carts per week or 400 swords per week.200C=400S so IC= 25 and IS= ½ CHodar’s marginal opportunity cost of 1 cart is constant at 2 swords, meaning that for Hodar to produce 1 more cart, it must give up producing 2 swords; inversely, Hodar’s marginal opportunity cost of 1 sword is constant at one half of a cart, meaning that for Hodar to produce 1 more sword, it must give up producing one-half of a cart.Groot can use all its available recourses and current technology to produce either 240 carts per week or 1200 swords per week.240C=1200S so IC= 5s and IS ½ CGroot’s marginal opportunity cost of 1 cost is constant at 5 swords and Groot’s marginal opportunity cost of 1 sword is constant at 1/5 of a cart.A bowed- out PPF illustrates increasing, rather than constant marginal opportunity cost.Marginal opportunity cost: as the economy increases its production of one good in one-unit increments, it must decrease its production of the other good by larger and larger amounts (a numerical example is on page 42 of the textbook)This occurs because some resources are better suited to produce one good rather than the other.A bowed-out PPF is more realistic than a straight-line PPF, but we often use straight-line PPFs for simplicity (the conclusions are the same for both)A Pff is a curve that illustrates the relationship between the production quantities of two good (shown on the x-axis and the y axis), holding resources and technology constant (not shown on axis)When a variable shown on an axis changes, we move along the cure to a new point on the curve, but when a variable not shown on an axis changes, we shift the curve to a new position.When an economy gains resources its PPF shifts outward and when the economy loses resources it shifts inward.An improvement in technology makes it possible for an economy to produce more goods and service with the same amount of resourcesEconomic growth: the ability of the economy to increase the production of goods and serviceAn increase in the size of labor forcean improvement in corn production technologycomputersCornMacro 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