Chapter 1 Key terms indicates that there is less of a good freely available from nature than people would like Mechanisms that have been used to deal with the problems of scarcity 1 Force 2 Tradition 3 Authority 4 Market 5 Combination of 1 4 Scarcity and poverty is not the same thing Absence of poverty implies that some basic level of need has been met absence of scarcity implies that our desires for goods are fully satisfied Some day we may eliminate poverty but never scarcity Opportunity cost the highest valued alternative that must be sacrificed as a result of choosing an option what you give up Utility The subjective benefit or satisfaction a person expects from a choice or course of action The economic way of thinking There is always trade offs Individuals choose purposefully Referred to as economizing behavior Try to get the most benefits for the least cost Incentive matters As incentives goes up you are more likely to do something and vice versa Good intentions do not necessary result in good outcomes Fallacy of composition Assumption what is good for an individual is good for a group An Inquiry into the Nature and causes of the wealth of nations by Adam Smith 1776 Smith believed a market economy would generally bring individual self interest and the public interest into harmony Chapter 2 Key terms Transaction cost the time and effort and other resources necessary to search out negotiate and conclude an exchange hinder the gains from trade in an economy Private property rights Owners use their resources in ways to benefit other and avoid doing harm to them only one person owns it Common rights Everyone owns it Mutual gain Is a foundation of trade when two parties engage in voluntary exchange they are both made better off The law of comparative advantage Makes the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost translation Make something your good at and trade for something you re not good at Production Possibilities curve Shows the maximum combination of any two products that can be produced with a fixed quaintly of resources Over time a PPC can be shifted outward by Investment Technological advances Improved institution Great work effort forgoing leisure All outputs on the PPC are efficient All points outside the curve are unattainable All points inside the curve are inefficient If the curve shifts out that means growth in production If the curve shifts inward it means it is producing less Chapter 3 Key terms Law of demand the inverse relationship between price and quantity demanded when price rises quantity demand falls When price changes quantity demanded changes but demand does not change This is a movement along the demand curve A change in demand is a shift in the entire demand curve A change in quantity demanded is a movement along the same demand curve The law of supply Positive or direct relationship between price and quantity supplied when price rises Quantity supplied rises as price decreases producers will supply less Supply and demand curves Below Increase in demand shifts up Decrease in demand shifts down Increase in supply shifts right Decrease in supply shifts left
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