Ch 1 I What Is Economics About A Scarcity Means Having To Make Choices 1 Scarcity is present whenever there is less of a good or resource freely available from nature than people would like 2 Choice the act of selecting among alternatives is the logical consequence of scarcity 3 Resources are the ingredients or inputs people use to produce goods or services 4 Three general categories of resources a Human Resource the productive knowledge skill and strength of human beings b Physical Resource things like tools machines and buildings that enhance our ability to produce goods 1 human made resources are called capital c Natural Resources things like land mineral deposits oceans and rivers 5 Human ingenuity discovery improved knowledge and better technology have enabled us to produce more goods and services from available resources B Scarcity and Poverty Are Not The Same 1 Poverty is a subjective concept that refers to a personal opinion of weather someone meets an arbitrary defined level of income C Scarcity Necessitates Rationing 1 Rationing allocating a limited supply of a good or resource among people who would like to have more of it D Scarcity Leads to Competitive Behavior 1 Competition is a natural outgrowth of scarcity and the desire of human beings to improve their conditions 2 Competition is an important ingredient in economic progress A The Use of Scarce Resource Is Costly So Decision Makers Must Make Trade offs 1 No Free Lunch the use of resources to produce one good diverts these resources from the production of another good 2 Opportunity Cost the highest valued alternative that must be sacrificed as a result of choosing an option B Individuals Choose Purposefully They Try To Get The Most From Their Limited Resources 1 Economizing Behavior choosing the option that offers the greatest benefits at the least possible cost 2 Utility the benefit or satisfaction that an individual expects from the choice of a specific alternative II The Economic Way of Thinking C Incentives Matter Choice Is Influenced In a Predictable Way By Changes In Incentives 1 One of the most important guidepost in economic thinking D Individuals Make Decisions On The Margin 1 Marginal difference in the costs and benefits between alternatives 2 Should production be expanded or reduced That choice should be based on marginal cost E Although Information Can Help Us Make Better Choices Its Acquisition Is Costly F Because of Secondary Effects Economic Actions Often Generate Indirect As Well As Direct Effects 1 Secondary Effects the indirect impact of an event or policy that not be easily and immediately observable 2 Secondary effects can be intended or unintended G The Value of a Good or Service Is Subjective H The Test of a Theory Is Its Ability To Predict 1 Scientific thinking developing a theory from basic principles and testing it against events in the real world is economic thinking III Positive and Normative Economics 1 Positive Economy the scientific study of what is among economic relationship 2 Normative Economics judgments about what ought to be 3 Normative economics can t be proven wrong because they are an opinion IV Pitfalls to Avoid In Economic Thinking A Violation of The Ceteris Paribus Condition Can Lead One To Draw The Wrong Conclusion 1 Ceteris Paribus means other things constant B Good Intentions Do Not Generate Desirable Outcomes C Association Is Not Causation D The Fallacy of Composition 1 Fallacy of Composition erroneous view that what is true for the individual will also be true for the group 2 Microeconomics how human behavior affects the conduct of affairs within narrowly defined units 3 Macroeconomics how human behavior affects the conduct of affairs within highly aggregated markets I What Shall We Give Up A Opportunity Cost Ch 2 1 In economics when we refer to a cost of an action we are referring to its opportunity cost 2 Monetary cost can be measured in terms of dollars and cents B Opportunity Cost and The Real World 1 Failure to consider opportunity cost leads to unwise decision making II Trade Creates Value A When Individuals Engage In Trade Both Parties Are Better OFF B By Channeling Goods and Resources To Those Who Value Them Most Trade Creates Value and Increases The Wealth Created By a Societies Resources C Transaction Cost A Barrier To Trade 1 Transaction Cost the time effort and other resources needed to search out negotiate and complete an exchange 2 By reducing transaction cost wealth and value are created D The Middle Man As a Cost Reducer 1 Middleman a person who buys and sells goods or services or arranges trades III The Importance of Property Rights 1 Property Rights the rights to use control and obtain benefits from a good or resource 2 Private property rights involve three things a the right to exclusive use of the property b legal protection against invasion form other individuals who would seek to use or damage without owners consent c the right to transfer sell exchange or mortgage the property 3 Private owners can gain by employing their resources in ways that are beneficial to others and they bear the opportunity cost of ignoring the wishes of others 4 Private owners have a strong incentive to care for and properly manage what they own A Private Ownership and Markets 1 the extended order the tendency for markets to lead perfect strangers from different backgrounds around the world to cooperate with one another IV Production Possibility Curve 1 Production Possibilities Curve a curve that outlines all possible outputs that could be produced assuming a a fixed amount of productive resources b a given amount of technical knowledge c full and efficient use of those resources A Shifting The Production Possibility Curve Outward 1 An increase in the economy s resource base would expand over ability to produce goods and services a Investment the purchase construction or development of resources including physical assets such as plants and machinery and human assets such as better education 2 Advancements in technology can expand the economy s production possibility curve a Technology the technological knowledge available in an economy at any given time b Invention the creation of a new product or process c Innovation the successful introduction and adoption of a new product or process d Entrepreneur a person who introduces new products or improved technologies and decides which project s to undertake e Creative Destruction the replacement of old products and production
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