09 17 2013 Chapter 1 Microeconomics Macroeconomics Opportunity cost chosen Marginal benefit Examines the functioning of individual industries and the behavior of individual decision making units Examines the economic behavior of aggregates on a national scale The benefit of the next best alternative to the activity you have Basis of cost benefit economic reasoning Always less than the benefit of what you have chosen Additional benefits Connected to consuming an additional unit of a good Undertaking one or more unit of an activity Value changes and depends on different individuals and situations Marginal costs Additional costs Connected to consuming an additional unit of a good Undertaking one more unit of an activity A market in which profit opportunities are eliminated almost Efficient market instantaneously Decisions at the margin Characterized by weighing the marginal benefits of a change against the marginal costs of a change with respect to current conditions The Economic Decision Rule If the marginal benefits of doing something exceed the marginal costs do it MB MC do it If the marginal benefits of doing something do not exceed the marginal costs don t do it MC MB don t do it Positive economics making judgments Seeks to understand behavior and the operation of systems without Describes what exists and how it works Cause Effect Normative economics Analyzes outcomes of economic behavior evaluates them as good or bad and may prescribe courses of action Also known as policy economics Judgment and opinion Ockham s razor Principle that irrelevant detail should be cut away Ceteris paribus all else equal Used to analyze the relationship between two variables while the values of other variables are unchanged Post hoc ergo propter hoc If event A happens before event B it is not necessarily true that A caused B Fallacy of composition whole Empirical economics Efficiency False belief that what is true for a part is necessarily true for the Collection and use of data to test economic theories An efficient economy is one that produces what people want at the least possible cost Allocative efficiency Marginal benefits marginal costs Equity Fairness Economic growth Stability Market Marginal analysis costs Utility Increase in the total output of an economy Condition in which national output is growing steadily Low inflation and full employment of resources A group of buyers and sellers of a good or service and the institution by which they come together to trade Analysis that involves comparing marginal benefits and marginal The satisfaction one receives from a good Disutility Bad Good The dissatisfaction one receives from a bad Anything from which individuals receive disutility Anything from which individuals receive utility Incentives matter Incentives Costs and benefits of making specific decision Changing incentives changes peoples behavior Operate on all levels o Personal familial industry and societal Marginal changes in cost or benefits motivate people to respond Economics trains you to Think in terms of alternatives Evaluate the cost of individual and social choices Chapter 2 Capital 09 17 2013 Things that are produced and then used in the production of other good and services Factors of production or factors Inputs into the process of production Another term for resources Process that transforms scarce resources into useful goods and Production services Inputs resources Outputs Opportunity cost Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants Goods and services of value to households The best alternative that we give up when we make a choice or decision Theory of Comparative Advantage Theory that specialization and free trade will benefit all trading parties even those that may be absolutely more efficient producers Absolute advantage A producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources a lower absolute cost per unit Comparative advantage A producer has a comparative advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost Consumer goods Goods produced for present consumption Investment Process of using resources to produce new capital Production possibility frontier ppf A graph that shows all the combinations of goods and services that can be produced if all of society s resources are used efficiently There is a limit to what you can achieve given the existing institutions resources and technology Every choice made has an opportunity cost You can get more of something only be giving up something else More output is represented by an outward shift in the ppf ppc Focuses on productive efficiency and ignores distribution Marginal rate of transformation MRT The slope of the production possibility frontier ppf Economic growth An increase in the total output of an economy Growth occurs when a society acquires new resources or when it learns to produce more using existing resources Command economy Laissez faire economy An economy in which a central government either directly or indirectly sets output targets incomes and prices An economy in which individual people and firms pursue their own self interest without any central direction or regulation The institution through which buyers and sellers interact and Market engage in exchange Consumer sovereignty The idea that consumers ultimately dictate what will be produced by choosing what to purchase Free enterprise in search of profits Trade off The freedom of individuals to start and operate private businesses The idea that because of scarcity producing more of one good or service means producing less of another good or service Trade offs force society to make choices particularly when answering the following three fundamental questions o What goods and services will be produced o How will the goods and services be produced o Who will receive the goods and services produced Scarcity The condition in which our wants are greater than the limited resources available to satisfy those wants The Economic Problem The quantity of goods services and usable resources depends on technology and human action Degree of scarcity is constantly changing Law of Increasing Opportunity Costs As more of a good is produced the opportunity costs of producing that good increase Productive efficiency resources and technology