CHAPTER 1.1: Scarcity Choice and Cost- Scarcity is thecondition of having to choose among alternatives- Scarce good- good for which the choice of one alternative requires that another be given up- Free good- good for which the choice of one use does not require that another be given upo i.e. when you use gravitiy, it does not prevent your neighbor from using gravity- Opportunity cost- the value of the best alternative forgone in making any choiceScarcity and the Fundamental economic questions- What should be produced?- How should goods and services be produced?- For whom should goods and services be produced?2.1: The Economoic Way of thinking- Distinguishing features between the economic and the social science approach to choice:o Economists give special emphasis to the role of opportunity costs in their analysis of choiceso Economists assume that individuals make choices that seek to maximize the value of some objectiveo Economists argue that individuals pay attention to the consequences of small changes in the levels of the activities they pursue- Economists argue that an understanding of opportunity cost is crucial to the examination of choices.- Benefit of the economic way of thinking:o It pushes us to think about the value of alternatives in each problem involving choice- Choice at the margin- decision to do a little more or a little less of something- Margin- current level of an activity- The elements of opportunity costs, maximization, and choices at the margin can be found in each of two broad areas of economic analysiso Microeconomics- branch of economics that focuses on the choices made by consumers and firms and the impacts those choices have on individual marketso Macroeconomics- branch of economics that focuses on the impact of choices on the total, or aggregate, level of economic activity2.3- Putting economics to work- Economics majors have a wide range of employment opportunities- Careerso Economists work in government, for businesses, and in colleges and universities- Applying economics to other fieldso Undergraduate work in economics serves as excellent preparation for law schoolo Average salary offers for eco majors are among the highest across the disciplines3. The economists’ tool kit- Variable- something whose value CAN change- Constant- something whose value does NOT change- Scientific method- systematic set of procedures through which knowledge is created- Hypothesis- assertion of a relationship between two or more variables that could be proven to be false- Theory- hypothesis that has not been rejected after widespread testing and that wins general acceptance- Law- theory that has been subjected to even more testing and that has won virtually universal acceptance3.1 Models in Economics- Model- set of simplifying assumptions about some aspect of the real worldChapter 2 Confronting Scarcity: Choice in production- Production possibilities model- shows the goods and services that an economy is capable of producing – its opportunities – given the factors of production and the technology it has availableo a graphical representation of the alternative combinations of goods and services an economy can produceo describes opportunity costs and tradeoffs- Economic system- set of rules that define how an economy’s resources are to be owned and how decisions about their use are to be made- Factors of production- resources available to the economy for the production of goods and services- Utility- value or satisfaction, that people derive from the goods and services they consume and the activities they pursue- Labor- human effort that can be applied to the production of goods and serviceso Human capital- skills a worker has as a result of education, training, or experience that can be used in production- Capital- factor of production that has been produced for use in the production of other goods and serviceso Financial capital- includes money and other “paper” assets (such as stocks and bonds) that represent claims on future paymentso Tools such as hammers, screwdfrivers, and wrenches are also capital- Natural resources- the resources of nature that can be used for the production of goods and services- The following play a crucial role in putting factors of production to worko Technology- the knowledge that can be applied to the production of goods and serviceso Entrepreneur- person who, operating within the context of a market economy, assumesvarious risks in the hopes of earning profits by finding new ways to organize factors of production- Comparative advantage- in producing a good or service is the situation that occurs if the opportunity costs of producing that good or service is lower for that economy than for any other- Law of increasing opportunity cost- states that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase- We can use the PP model to examine choices in the production of goods and services- In applying the model, we assume that:o The economy can produce two goodso Technology and the factors of production available to the economy remain unchanged- Two things could leave an economy operating at a point inside its PPCo The economy might fail to use fully the resources available to ito It might not allocate resources on the basis of comparative advantage- In either case, production within the PPC implies the ecnomy could improve its performance- Specialization- a situation In which an economy is producing the goods and services in which it has a comparative advantage- The most important implications of the concepts of comparative advantage and the PPC relates to international trade- An increase in the physical quantity or in the quality of factors of production available to an economy or a technological gain will allow the economy to produce more goods and services.o It will shift the economy’s PPC outward- Economic growth- The process through which an economy achieves an outward shift in its PPC- Market capitalist economy- economy in which resources are generally owned by private individuals who have the power to make decisions about their use- Command socialist economy (centrally planned)- economy in which govt is the primary owner of capital and natural resources and has broad power to allocate the use of factors of production- Mixed economy- economy that combines elements of market capitalist and
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