ARE 1150 1st EditionExam # 1 Study Guide Lectures: 1 - 8Chapter 1Definitions of Key Terms and Concepts- Economics = social science that examines how individuals, institution, and society make optimal choices under conditions of scarcity.- Economics perspective = includes three elements: o scarcity and choiceo purposeful behavioro marginal analysis - Opportunity cost = the value of the good, service, or time forgone to obtain something else - Utility = the pleasure, happiness, or satisfaction obtained from consuming a goodor service- Marginal analysis = comparisons of marginal benefits and marginal costs, usuallyfor decision making. Marginal = extra or additional- Scientific method = a method of procedure consisting of systematic observation, measurement, experiment and the formulation, testing and modification of a hypothesis - Economic principle = a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions- Microeconomics = the part of economics concerned with individual units such asa person, a household, a firm, or an industry – decision making by individual customer, workers, households, and business firms- Macroeconomics = examines either the economy as a whole or its basic subdivision or aggregates, such as the government, household, and business sectors- Aggregate = a collection of specific economic units treated as if they were one unit - Positive economics = focuses on facts and cause-and-effect relationships. It includes description, theory development, and theory testing. It tries to establishscientific statements about economic behavior, and deals with what the economy is actually like - Normative economics = incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal (policy economics)- Budget line = a schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income - Economic resources = inputs into the production process and can be classified as land, labor, capital, or entrepreneurial ability- Capital = includes all manufactured aids used in producing consumer goods and services – includes all factory, storage, transportation, and distribution facilities, as well as tools and machinery- Investment = the purchase of capital goods - Entrepreneurial ability = takes the initiative in combining the resources of land, labor, and capital to produce a good or a service – the driving force behind production- Factors of production = land, labor, capital, entrepreneurial ability = inputs- Consumer goods = products that satisfy our wants directly- Capital goods = products that satisfy our wants indirectly by making possible more efficient production of consumer goods - Production possibilities curve = displays the different combinations of goods andservices that society can produce in a fully employed economy, assuming a fixed availability of supplied of resources and constant technology - Law of increasing opportunity costs = as the production of a particular good increases, the opportunity cost of producing an additional unit rises - Economic growth = a larger total output – when an increase in the quantity or quality of resources occurs, the production possibilities curve shifts outward and to the right Readings not covered in lecture- Theories, Principles, and Models o Economics relies on the scientific method which involves  Observing real-world behavior and outcomes Based on those observations, formulating a possible explanation of cause and effect (hypothesis) Texting this explanation by comparing the outcomes to the predicted outcomes Accepting, rejecting, or modifying the hypothesis As favorable results accumulate, the hypothesis evolves into a theoryo Economists develop theories of the behavior of individuals and institutions within the production, exchange, and consumption of goods and serviceso The theories are used to remove the clutter and confusion from the scopeof economic reality o Economic principles  Generalizations – economic principles are generalizations relating to economic behavior or to the economy itself Other-things-equal assumption – the assumption that factors other than those being considered to not change. They assume that all variable except those under immediate consideration are held constant for a particular analysis - A Qualification: International Tradeo Production possibilities analysis implies that an individual nation is limitedto the combinations of output indicated by its production possibilities curve o An economy can circumvent, through international specialization and trade International specialization means directing domestic resources tooutput that a nation is highly efficient at producing Specialization and trade allow a nation to get more of a desired good at less sacrifice of some other good  Specialization and trade have the same effect as having more and better resources or discovering improved production techniques Class NotesChapter 1: Limits, Alternatives, and Choices I. Economics = social science concern with making optimal choices under conditions of scarcityII. Key features of economicsA. Scarcity and Choicei. Choices need to be madeii. Opportunity cost = value of resource in the best use; worth of resources in its next most valuable useiii. Resource is used sufficiently when opportunity cost is minimizedB. Purposeful Behaviori. Rational self interestii. Individual looks for and exploits opportunities to increase their utilitya. Selfless activities/acts may provide utility III. Marginal Analysis A. Marginal = additional or extrai. Rule of decision-makingii. Compare marginal benefits of a proposed action with marginal costiii. Marginal Benefit = Marginal Cost  optimal level of activityIV. Marginal analysis in action: optimal pollution abatementa. Abatement of pollution = reduction in pollution, i.e. more abatement means less pollution. Does it make sense that marginal cost of abatement(MCA) increases with an increase in abatement? Is it believable that marginal benefit of abatement (MBA) decreases with greater abatement?V. Micro vs. Macroa. Microeconomics = decision-making by a characteristic of individual units of economy i. The output of an individual form at a given market price of their product b. Macroeconomics =