Macro Final Study Topics What is Economics About o Scarcity and choice are the two essential ingredients of economic met satisfied us analysis o A good is scare when the human desire for it exceeds the amount freely available from nature Scarcity requires us to choose among available alternatives Every choice entails a trade off o Every society will have to devise some method of rationing scarce resources among competing uses o Markets generally use price as the rationing device Competition is a natural outgrowth of the need to ration scarce goods o Scarcity and poverty are not the same thing o Absence of poverty implies that some basic level of need has been o An absence of scarcity implies that our desires for goods are fully o We may someday eliminate poverty but scarcity will always be with o Scarcity Fundamental concept of economics that indicates tat there is less of a good freely available form nature than people would like o Choice The act of selecting among alternatives o Resource An input used to produce economic goods Land Labor skills natural resources and capital are examples o Throughout history people have struggled to transform available but limited resources into things they would like to have economic goods o Capital Human made resources such as tools equipment and structures used to produce other services They enhance our ability to produce in the future o Objective A fact based on observable phenomena that is not influenced by differences in personal opinion o Subjective An opinion based on personal preferences and value judgments o Rationing Allocating a limited supply of a good or resource among people who would like to have more of it o While price performs the rationing function the good or resource is allocated to those willing to give up the most other things in order to get it The Economic Way of Thinking o Economic theory A set definitions postulates and principles assembled in a manner that makes clear the cause and effect relationships o Opportunity cost The highest valued alternative that must be sacrificed as a result of choosing an option o Economizing behavior Choosing the option that offers the greatest benefit at the least possible cost o Utility The subjective benefit or satisfaction a person expects from a choice or course of action o Marginal Term used to describe the effects of a change in the current situation For example a producer s marginal cost is the cost of producing an additional unit of a product given the producer s current facility and production rate o Secondary effects The indirect impact of an event or policy that may not easily and immediately observable In the area of policy these effects are often both unintended and overlooked o Scientific thinking Developing a theory from basic principles and testing it against events in the real world Good theories are consistent with and help explain real world events Theories that are inconsistent with the real world are invalid and most be rejected o Economics is a way of thinking that emphasizes eight points o 1 The use of scarce resources to produce a good always has an opportunity cost o 2 Individuals make decisions purposefully always seeking to choose the option they expect to be most consistent with their personal goals o 3 Incentives matter The likelihood of people choosing an option increases as personal benefits rise and personal costs decline o 4 Economic reasoning focuses on the impact of marginal changes because it is the marginal benefits and marginal costs that influence choices o 5 Because information is scarce uncertainty is a fact of life o 6 In addition to their direct impact economic changes often generate secondary effects o 7 The value of a good or service is subjective and varies with individual preferences and circumstances o 8 The test of an economic theory is its ability to predict and explain events in the real world The Importance of Adam Smith the Father of Economic Science o Foundation of Economics was laid in 1776 when Adam Smith published The Wealth of Nations In this he stressed the concept of the invisible hand which is free exchange and competitive markets harnessing self interest as a creative force o He believed that individuals pursuing their own interests would be directed by invisible hand of market prices toward the production of those goods that were most advantageous to society What Shall We Give Up Production Possibilities Curve o The highest valued activity sacrificed when a choice is made is the opportunity cost of the choice differences or changes in opportunity costs help explain human behavior o Your opportunity cost of attending college is the value of the next best alternative the salary at the job you would have taken o A curve that outlines all possible combinations of total output that could be produced assuming 1 a fixed amount of productive resources 2 a given amount of technical knowledge and 3 full and efficient use of those resources o The slope of the curve indicates the amount of one product must be given up to produce more of the other o A point inside the curve is inefficient a point on the curve in efficient and a point outside the curve is unattainable o Four factors that shift the production possibilities curve outward o 1 An increase in the economy s resource base would expand our ability to produce goods and services o 2 Advancements in technology can expand the economy s o 3 An improvement in the rules under which the economy functions production possibilities can also increase output o 4 By working harder and giving up current leisure we could increase our production of goods and services o Investment The purchase construction or development or resources including physical assets such as plants and machinery and human assets such as better education Investment expands an economy s resources o The process of investment is sometimes called capital formation o Technology The technological knowledge available in an economy at any given time The level of technology determines the amount of output we can generate with our limited resources o Invention The creation of a new product or process often facilitated by the knowledge of engineering and science o Innovation The successful introduction and adoption of a new product or process the economic application of inventories and marketing techniques o Entrepreneur A person who introduces new products or improved technologies and decides which projects to undertake A
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