MANA 3318 1st EditionExam # 1 Study Guide Lectures: 1 - 3Chapter 1 (August 20)Chapter 1: Limits, Alternatives, and ChoicesEconomics is about wants and means. The Economic PerspectiveEconomics: the study of how people, institutions, and society make economic choices under conditions of scarcity. Economic perspective: a viewpoint that envisions individuals and institutions making rational decisions by comparing marginal benefits and marginal costs of their actions. Scarcity and Choice: Scarce economic resources means limited goods and services. Restricts options and demands choices. We can't have it all. Must make decisions. "No free lunch" bc someone bears a cost. Opportunity costs: the value of the good, service, or timeforgone to obtain something else. Purposeful Behavior: Human behavior reflects "rational self-interest". They want to increase utility. Utility: the satisfaction obtained from consuming a good or service. Their decisions are "purposeful" or "rational". "Purposeful behavior" does not mean perfect, mistakes can be made by businesses and consumers. Rational self-interest does not equal selfishness. Marginalism: Comparing Benefits and Costs: Marginal analysis: the comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making. Theories, Principles, and ModelsEconomics relies on the scientific method. Scientific method: the systematic pursuit of knowledge by observing facts and testing hypotheses to obtain theories, principles, and laws. Observing, hypothesis, testing. Principles: statements about economic behavior that enable prediction of the probable effects of certain actions. Economic principles are generalizations. Other-things-equal assumption: the assumption that factors other than those being considered do not change. Also called ceteris paribus. Microeconomics and MacroeconomicsMicroeconomics: Microeconomics: the part of economics concerned with individual decision-making units, such as consumer, a worker, or a business firm. Macroeconomics: Macroeconomics: the part of economics concerned with the economy as a whole or major components of the economy. Aggregate: a collection of specific economic units treated as if they were one unit. Such as millions of consumers are aggregated as "consumers". Individual's Economic ProblemEconomic problem: the need for individuals and society to make choices because wants exceed means. Economic wants are unlimited but the means (income, time, resources) are limited. Limited Income: Even the wealthy have limited income. Income is wages, interest, rent, and profit. Unlimited Wants: People have unlimited wants. Wants are necessities (food, shelter, clothing) to luxuries (perfumes, yachts, sports cars). We have to pick and choose what we want. A Budget Line: Economic problem for individuals is a budget line. Budget line: a line that showsvarious combinations of two products a consumer can purchase with a specific money income, given the products' prices. Also called budget constraint. Shows combos of two products a consumer can purchase with a specific money income. Attainable and Unattainable Combinations: Combos you can afford to buy (on or within the budget line) are attainable. Combos beyond the budget line are unattainable. Trade-offs and Opportunity Costs: There are trade-offs between two products. Give up one to get more of the other. Constant opportunity cost: an opportunity cost that remains the same as consumers shift purchases from one product to another along a straight-line budget line. Choice: Limited income forces people to choose what they want. Income Changes: Location of budget line varies with money income. Increase shifts line to right, decrease shifts line to left. Society's Economic ProblemSociety faces scarcity, or limited resources. Scarce Resources: Economic resources: the land, labor, capital, and entrepreneurial ability used in the production of goods and services. All natural, human, and manufactured resources are economic resources. Resource Categories: 4 categories. Land: Land: natural resources ("gifts of nature") used to produce goods and services. Labor: Labor: the physical and mental talents and efforts of people used to produce goods and services. Capital: Capital: human-made resources (buildings, machinery, andequipment) used to produce goods and services. Spending that pays for producing and getting capital goods is called investment. Investment: the purchase of capital resources. Entrepreneurial Ability: Entrepreneurial ability: the human talent that combines the other resources to produce a product, make strategic decisions, and bear risks. Entrepreneurs take initiative in combining all resources into a good or service, make strategic business decisions, innovates, bears risk. Factors of production: economic resources: land, labor, capital, and entrepreneurial ability. Production Possibilities ModelIn this model, we assume full employment, fixed resources, fixed technology, two goods. Consumer goods: products and services that directly satisfy consumer wants. Capital goods: items that are used to produce other goods and therefore do not directly satisfy consumer wants. Production Possibilities Table: Lists different combos of two products that can be produced with specific set of resources. Society must sacrifice some of one good to obtain moreof another good. Production Possibilities Curve: PPT can also be shown on a graph as a curve. Production possibilities curve: a curve showing the different combinations of goods and services that can be produced in a fully employed economy, assuming the available supplies of resources and technology are fixed. Law of Increasing Opportunity Costs: Law of Increasing Opportunity Costs: the principle that as the production of a good increases, the opportunity cost of producing an additional unit rises. Economic Rationale: Economic resources are not completely adaptable to alternative uses. Some resources are better at producing one type of good than another. Optimal Allocation: Of all production combos, which is best? Economic decisions are based on marginal benefits (MB) and marginal costs (MC). Marginal benefits must equal marginal cost. On a graph it’s the intersection. Unemployment, Growth, and the FutureA Growing Economy: Increases in Resource Supplies: Although resources are fixed, they can change over time such as a growing population increases supply in labor. Economic growth: an outward shift of