MicronomicsChapter 1 – The Nature of Economics- Limited resources, unlimited wants- All decisions in which we consider a cost and a benefit can be considered economic decisions- Benefits > costsSelf Interest and Rationality- Rational assumption – people don’t intentionally make decisions that leave them worse offThe Power of Economic Analysis/Policy and Incentives- Incentives – reward or punishment for engaging in a particular active – influence decisions- Profit is a very powerful incentive in the U.S. market economyDefining Economics- Scarcity will always exist; it is NOT a shortage. It affects both rich and poor- Economics: the study of how people allocate their limited (scarce) resources to satisfy their unlimited wants; the study of how people make choices- Micronomics – study of decision-making by individuals (or households) and by firms- Macronomics – study of behavior of the economy as a wholeo You can’t isolate one without the otherEconomics as a Science- Models – simplified representations of the real world used as the basis for predictions or explanations; useful if they predict economic outcomes accurately - “Ceteris Paribus” Assumption: Latin – “all other things equal”- Variable: well-defined item that can take on different valueso Dependent: left-hand side variable of interesto Independent: freely change, analyze effects of this change on dependent variable- Direct relationship: two variables move in the same direction (positive slope)- Inverse relationship: two variables move in the opposite direction (negative slope)Positive vs. Normative Economics- Positive – written in a way that allows it to be tested true or false- Normative – statements that can’t be proven true or false; “should” or “ought to”Types of Economies- Market economyo When everyone does what’s in their own best interest, the economy thriveso Prices and quantities set in relatively free marketso Institutions (laws) protect private property and enforce contractso Very decentralized- Command Economy (Soviet Russia)o Central Government makes all output, pricing, and allocation decisionso Lots of information is required, tough to maintain – eventually failedo Black market can developo Lack of profit and innovation incentivesMicronomicsChapter 2: Scarcity and the World of Trade-Offs- Production: any activity that results in the conversion of resources into products that can be used in consumption; production: input → outputs: goods- Resources or factors of production: inputs that are used to produce things that people want- Input typeso Land – land, natural resourceso Labor – people, employeeso Physical capital (K) – all manufactured resources, machines, buildings, mechanical equipmento Human Capital – person’s training and educationo Entrepreneurship – risk taker – could lose a lot of time and money, make business decisions- With each choice made, we give up some alternative- Opportunity cost: the highest valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want- Limited resources and unlimited wants → Scarcity → Choices → Opportunity CostProduction Possibilities Curve- The production possibilities curve (PPC) – represents all possible maximum combinations of total output that can be produced- Along the PPC, there is a fixed quantity of inputs being used efficiently- PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs at two levels: individual and societal- Efficiency: a given level of inputs is used to produce the maximum output possible. Alternatively, the situation in which a given output is produced at minimum cost- Law of Increasing Relative Cost – as society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases – accounts for bowed shape of the PCC- Economic Growth – illustrated by an outward shift of the PPC; occurs over a period of timeo Caused by – increase in resources and technology or education- Capital Goods and Growtho Consumer goods – goods produced for personal satisfactiono Capital goods – goods used to produce other goodso We produce capital goods to increase future production and consumptionSpecialization- Leads to greater productivity - We do specialize - Trade allows consumption to be increase and varied- Absolute advantage – if you have absolute advantage, you can produce more output with thesame input- Comparative advantage – the ability to produce a good or service at a lower opportunity cost. This is always a relative conceptDivision of Labor- Rational individual choose their comparative advantage and specialize- Specialization leads to division of labor: increases overall production – assembly lineTrade among Nations- Economic efficiency improves – overall output increases, but PPC for individual country doesn’t shift because of trade; consumption increases!Sources of Comparative Advantage – individual and nationalChapter 3: Demand and SupplyMicronomics- Markets: arrangements that individuals have for exchanging with one anothero Represent the interaction of buyers and sellerso Not necessarily a physical location (Ebay, Amazon)- In a market-based economy, prices are determined by the force of supply and demando Demand – buyers, consumerso Suppliers – firms, producers, sellersDemand-Quantity demanded: the amount of a good or service that consumers wish to purchase given a certain income, price (P), and time period-Demand schedule: a table showing price and quantity demanded relationship of a good, ceteris paribus (all other things equal) [ONLY examining P and QD-Demand curve: the graphical relationship of the demand schedule. Price is on the vertical axis and quantity is on the horizontal axis-First Law of Demand: When the price of a good rises, we have a lower quantity demanded and vice versa (demand curse is negatively sloped)-Quantity demanded is inversely related to price, holding other factors constant-Market Demand: the demand of all consumers in the marketplace for a particular good or service-Demand curves – not static; we can move along the demand curve, or the entire curve could shift-Change in Quantity Demanded – MOVEMENT along a demand curve – caused by CHANGE in the PRICE of the goodo Price increases – move up and left along the demand curve (decrease in quantity demanded)o Price decreases – move down and to the right (increase in