Economics the study of how humans make choices under conditions of scarcity to fulfill their unlimited wants Microeconomics focus on the actions of individual agents within the economy like households workers and businesses Macroeconomics looks at the economy as a whole on broad issues like growth unemployment inflation trade balance CHAPTER 1 1 Give 3 reasons that explain why the division of labor an economies level of production Specialization to focus on the parts of the production process where they have an advantage workers learn to produce more quickly and with higher quality business to take advantage of economies of scale for many goods as the level of production increases the average cost of producing each individual unit declines The division and specialization of labor Adam Smith has been a force against the problem of scarcity 2 Suppose as an economist You are asked to analyze an issue unlike anything you have ever done before Suppose you have no specific model for analyzing that issue What should you do Economists analyze problems differently than do other disciplinary experts The main tools economists use are economic theories or models A theory is not an illustration of the answer to a problem Rather a theory is a tool for determining the answer 3 Regulation Rules of the game Heavily regulated economies underground economies transactions w o gov approval 4 Globalization expanding cultural political and economic connections between people around the world 5 Export goods and services produced domestically and sold in abroad Import goods and services produced abroad and then sold domestically 6 Gross Domestic Profit GDP measure of the size of total production in an economy Exports GDP Ratio measures what share of a country s total economic production is sold in other countries 7 Economies of Scale GRAPH when the average cost of producing each individual unit declines as total output increases Why an economic theory is fundamentally inaccurate The model s assumptions are unrealistic and do not adequately describe how agents behave in the real world An economist must make a series of simplifying assumptions to express and analyze complex behavior in a compact way If one or more of those assumptions are too strong or unrealistic the proposed theory may not explain economic behavior in the real world Determining that an often used assumption is not sufficiently valid can be a major breakthrough esp if other economic theories and representative models rely upon a similar assumption CHAPTER 2 1 Explain why individuals make choices on the budget constraint rather inside it or beyond it A point outside the constraint is neither affordable nor obtainable because it would cost more money than the individuals have in their budget On the contrary a point inside the budget constraint is not rational since it implies that individuals have not spent all of their money available The individuals will spend all of their income because there is no reason to save given our assumption of only one time 2 Opportunity Cost what must be given up to obtain sth desired the value benefit of the next best forgone alternative 3 Scarcity Wants are unlimited goods are are not free cost price tradeoffs all resources scarce opportunity costs everything costs next best forgone activity or choice 4 Law of diminishing marginal utility as a person receives more of a good additional or marginal utility from each additional unit of the good declines If you ate exclusively although it is your fav additional or marginal utility from those last few servings would NOT be very high ex work vs leisure pp use marginal analysis in a world of scarcity 5 Sunk costs that were incurred in the past and cannot be recovered should not affect the current decision terrible but 6 Production Possibilities Frontier PPF typically drawn as a curved line because of the law of the diminishing returns Typically some resources are better suited for producing one good than another which means that there are diminishing returns when moving such resources away from producing what they are best suited for Slope of the PPF the opportunity cost of producing additional unit of a good Budget constraint has straight line b c slope was determined by relative prices of the two goods in consumption 7 Productive efficiency given the available inputs and technology it is impossible to produce more of one good without decreasing the quantity that is produced of another good any choice inside the PPF is productively inefficient and wasteful b c it is possible to produce more of one good the other good or some combination of both goods Allocative efficiency means that the particular mix of goods a society produced the specific choice along the production possibilities frontier represents the combination and allocation that society most desires 8 Comparative advantage The opportunity cost of wheat in term of sugar cane is lower in the U S than in Brazil The U S has comparative advantage in wheat and Brazil has comparative advantage in sugar cane With TRADE goods are produced where the opportunity cost is lowest so total production benefiting both parties 9 What are the assumptions for the invisible bond to work CHAPTER 3 Market creates a great outcome self interest invisible hand Market assumptions Many buyers sellers Selling an identical product Perfect information No barriers to entry Private property rights STEP 1 Set up the initial equilibrium STEP 2 Introduce a shock determine whether D S or both are affected STEP 3 Which direction will the curve shift STEP 4 Determine the effect on Price and Quantity Demanded or Supplied 1 Demand amount of some good service consumers are willing to purchase price based on needs and wants the maximum amount of a product that buyers are willing and able to purchase over some time period at various prices holding all other relevant factors constant If you cannot pay for it you have NO effective demand because demand is also based on ability to pay Law of Demand Inverse relationship btw price quantity demanded All other variables affect demand held constant Demand refers to the curve vs Quantity demanded refers to the SPECIFIC point on the curve What affect Demand 1 Willingness to purchase 2 Ability to purchase 3 size or composition of the population 2 Supply the maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices holding all other relevant