Resources are employed by economic system to produce goods and services to satisfy our economic needs Economic wants far exceed productive capacity of limited resources therefore we are forced to make choices Truth underlying definition of economics social science concerned with how individuals institutions and society make optimal choices under conditions of scarcity 10 KEY CONCEPTS OF ECONOMICS 3 types a concepts pertain to individual b concept explain interaction among individuals c concepts deal with economy as whole and standard of living 1 scarcity in relationship to wants means you face tradeoffs so you must make choices A 2 Cost of choice you make is what you give up for it or opportunity cost 3 Choices are usually made at the margin we choose a little more or a little less of something 4 The choices you make are influenced by incentives 5 Specialization and trade will improve the well being of all participants B 6 Markets usually do a good job of coordinating trade among individuals groups and nations 7 Governments can occasionally improve the coordination function of the markets 8 The standard of living of the average person in a particular country is dependent on its production of goods and services A rise in the standard of living requires a rise in the output of goods and services C 9 If the monetary authorities of a country annually print money in excess of the growth of output of goods and services it will eventually lead to inflation 10 In the short run society faces a shot run tradeoff between inflation and its level of unemployment Economic perspective economic way of thinking a viewpoint that envisions individuals and institutions making rational decisions by comparing marginal benefits and marginal costs associated with their actions Opportunity cost amount of other products that must be forgone sacrificed to produce a unit of product Purposeful behaviour we as humans look for opportunities to increase utility pleasure happiness or satisfaction obtained from consuming a good or service we spend time energy and money to obtain maximize utility business firms are purposeful in deciding which products or services to make to maximize income consumption purposeful behaviour ISNT ppl immune from faulty logic being perfect decision makers it s simply ppl making decisions with some desired outcome in mind rational self interest ISNT selfishness marginal analysis comparison of marginal benefits and costs marginal extra additional a change in marginal cost marginal benefit THEORIES PRINCIPLES MODELS models simplified representations of how parts of economy work economic principle statement about economic behaviour or economy that enables prediction of probable effects of certain actions generalization o economic principles are generalizations of economic behaviour eg Consumers buy more when price falls o economic principles are expressed as tendencies of typical consumers workers firms other things equal assumption ceteris paribus o the assumption that factors other than those being considered do not change o assume that all variables except those under immediate consideration are held constant for an analysis graphical expression MICRO vs MACRO ECON Microecon concerned with individual units household firm industry concerning details small segments looks at decision making by individual customers Macroecon examined economy as a whole or basic subdivisions government household business sectors Aggregate collection of specific economic units treated as if they were one unit so all of consumers in Canadian economy CONSUMERS seeks to obtain overview general outline total output employment income POSITIVE NORMATIVE ECONOMICS Positive economics focus on facts and cause and effect relationships include description theory development theory testing avoids value judgements tries to establish scientific facts normative economics incorporates value judgements of what economy should be like or what policy actions should be recommended to achieve desireable goal undelies expressions of support for particular economic policy looks at desirability of certain aspects of economy positive economics WHAT IS normative economics subjective feelings of what s ought to should be ECONOMIC PROBLEM the need to make choices because needs and wants are unlimited while resources to satisfy are scarce limited income unlimited wants BUDGET LINE a schedule or curve that shows a various combination of 2 products that a consumer can obtain all combination beyond budget line unattainable opportunity cost and tradeoffs choices income change SCARCE RESOURCES Resource categories FACTORS OF PRODUCTION land includes all natural resources used in production process eg forests water resources labour physical and mental talents of individuals capital manufactured aids used in producing goods and services eg Factory storage transportation capital goods is different from consumer goods consumer goods directly satisfy wants and needs while capital goods do so indirectly by aiding production of consumer goods assume 1 full employment economy is using all availbale resources 2 fixed resources quantity and quality of factors of production are fixed 3 fixed technology state of technology methods used to make output is constant 4 two goods economy is producting only 2 goods consumer goods directly satisfy wants and capital goods satisfy wants indirectly by making possible more efficient production of consumer goods entrepreneurial ability entrepreneur takes initiative in combining resources of land labour and capital to produce good and service makes strategic business decisions that sets course of enterprise innovator commercializes new production production forms of business organization risk bearer has no guarantee or profit production possibilities curve curve showing the diff combinations of goods services that can be produced in a full employment full production economy where available supplies of resources and technology are fixed law of increasing opportunity costs as production of particular good increases opportunity cost of producing additional unit rises economic explanation economic resources are not completely adaptable to alternative uses resources are good at producing ONE product and isn t interchangeable to produce another therefore this causes increasing opportunity costs of B as you want more of A optimal allocation picking the optimal combination of A B on a production possibilities curve where