CHAPTER 1Economics: foundations and modelsScarcity: a situation in which unlimited wants exceed the limited resources available to fulfill those wantsAll societies & individuals face scarcityBecause resources are scarce, when you chose something you must give up something elseEconomics: the study of choices people make to attain their goals, given their scares resourcesEconomic mode: simplified version of reality used to analyze real world economic situationOften based on unrealistic assumptions that simplify the problem at hand w/o substantially affecting the validity of the answerNo single economic model can address every important topic, so we will use different economic models as we study different topicsEconomic analysis may be positive or normativePositive analysis: analysis concerned with what isCan be evaluated as true or false using only dataFor example: after speeding cameras were installed on I-380 the average speed of motorist decreasedNormative analysis: analysis concerned w/ what ought to beInvolve personal values, so they can’t be evaluated as true or false using only dataFor example: the government should install additional speed cameras on I-380Our focus will be on positive analysisEconomics is studied on 2 levels:Microeconomics: study of how households & firms make choices, how they interact in markets, and how the government attempts to influence their choicesMacroeconomics: study of the economy as a whole, including topic such as inflation, unemployment, & economic growthmicro and macro are closely intertwined because changes in the overall economy arise from decision of individual households & firmsTrade off: the idea that because of scarcity, producing more of one good or service means producing less of another good or service.Production possibilities frontier( PPF): curve showing maximum attainable combinations of 2 products that may be produced w/ available resources and current technologyEconomic model used to analyze the trade off that individuals, firms, countries face when deciding how to employ their scarce resourcesCombinations outside PPF are unattainable given available resources and current technology (scarcity)Combinations inside PPF are inefficient because some resources aren’t being used, (i.e., some resources are unemployed), so its is possible for the economy to produce more one good without producing less of anotherCombinations on the PPF are efficient because the maximum output is being obtained form the available technology and resources, so its impossible for the economy to produce more of one good without producing less of the other (trade off)Opportunity cost: highest valued alternative that must be given up to engage in an activityEvery choice has an opportunity cost because every choice has a next best alternativeIn PPF EXAMPLE near can use all of its available resources and current technology to produce either 200 laptops per week or 400 tablets per week200L= 400T 1L=2T 1T=.5LNears marginal opportunity cost of 1 laptop is constant 2 tablets, meaning that for Near to produce 1 more laptop it must give up producing 2 tablets; inversely nears marginal opportunity cost of 1 tablet is constant at one half of a laptop, meaning that for near to produce 1 more tablet it must give up producing one half of a laptopFar can use all of its available resources and current technology to produce either 220 laptops per week or 1100 tablets per week220L=1100T 1L=5T 1T=.2LFars marginal opportunity cost of 1 laptop is constant at 5 tablets and Fars marginal opportunity cost of 1 tablet is constant at 1/5 of a laptopBowed out PPF: illustrates increasing marginal opportunity cost as the economy increase its production of 1 good in 1 unit increments it must decrease its production of the good by larger and larger amounts (pg 44)Increasing marginal opportunity cost occurs because some resources are better suited to produce 1 good rather than the otherBowed out PPF is more realistic than straight line PPF but we will use straight line PPFs for simplicity (conclusion are the same for both)At any given time, the resources available to an economy are fixed, but over time, the resources available to an economy may increase or decreaseWhen an economy gains resources its PPF shifts inwardAn improvement in technology makes it possible for an economy to produce more goods and services with the same amount of resources, so the economy’s PPF shifts outward when technology improvesOutward shifts of an economy’s PPF represent economic growthEconomic growth: ability of the economy to increase the production of goods and servicesTrade: the act of buying and selling2 ways to satisfy our wants:self sufficiency or specialization and tradeif I were self sufficient I would produce everything I want, instead I chose to specialize in econ, to trade that service for money, and to trade that money for goods and services I wantwe gain from trade by specializing and trading we can consume a greater quantity and variety of goods and servicesPPFs depict the combinations of 2 goods that can be produced and consumed with out trade; where each individual, firm or country consumes on their PPF depends on their preferencesAssume that without trade near chooses to produce and consume 50 laptops and 300 tablets per week, while Far chooses to produce and consume 110 laptops and 550 tablets per weekAbsolute advantage: ability of an individual, firm, or country to produce more of a good or service than competitors, uing the same amount of resourcesFar has the absolute advantage in the production of both goods: in 1 week Far can produce a maximum of 220 laptops, while Near can only produce a max of 200 laptops; and in one week Far can produce a max of 1100 laptops, while Near can only produce a max of 400 tabletsComparative advantage: ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitorsNear has the comparative advantage in the production of laptops, Nears marginal opportunity cost of 1 laptop is only 2 tablets, while Fars marginal opportunity cost of 1 laptop is 5 tabletsFar has the comparative advantage in the production of tablets: Fars marginal opportunity cost of 1 tablet is only 1/5 of a laptop, while Nears marginal opportunity cost of 1 tablet is only ½ of a laptopNotice that it is possible to have the absolute advantage with out having the comparative advantage in the production of a particular good (e.g., Far and