Chapter 1: Economics: Foundations and ModelsEconomics is the study of the choices consumers, business managers, and government officials make to attain their goals, given their scarce resources.Economic models are simplified versions of reality used to analyze real-world economic situations.A market is a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.Scarcity means that although our wants are unlimited the resources available to fulfill those wants are limited.I. Three Key Economic Ideasa. People are rationali. Economists assume that consumers and firms use all available information as they act to achieve their goals. They weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs.b. People respond to economic incentivesi. People make decisions based on their lossesii. Banks would rather have robberies than to spend a huge amount of money on securityiii. People with health insurance don’t care about the consequences of being obese because they don’t have to pay for the hospital bills themselves.c. Optimal decisions are made at the margini. Marginal benefit – the pros of choosing to do one thing rather than anotherii. Marginal cost – the cons of choosing to do the other thing rather than that thingiii. Economists reason that the optimal decision is to continue in any activity up to the point where the marginal benefit equals the marginal cost- in symbols where MB = MCiv. Marginal analysis – the analysis that involves comparing marginal benefits and marginal costsII. The Economic Problem that every Society must Solvea. Economic Problem – only a limited amount of resources so can produce only a limited amount of goods and servicesb. Trade-offs – producing more of one good or service means producing less of another good or servicec. Opportunity cost – the highest-valued alternative that must be given up to engage in that activityd. What goods and services will be produced?i. The answer to this question is determined by the choices that consumers, firms, and the government make.ii. In each case, they must face the problem of scarcity by trading off one good or service for anotheriii. Each choice comes with an opportunity cost, measured by the value of the best alternative given upe. How will the goods and services be produced?i. Firms choose how to produce the goods and services they sellii. In many cases, firms face a trade-off between using more workers or using more machinesf. Who will receive the goods and service produced?i. It depends largely on no how income is distributedii. Individuals with the highest income have the ability to buy the most goods and serviceg. Centrally planned economies versus market economiesi. Centrally planned economies – the government decides how economic resources will be allocated1. Ex. Cuba and North Koreaii. Market economies – the decisions of households and firms interacting in markets allocate economic resources1. Everywhere elseh. The Modern “Mixed”