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What is Economics?
Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influences those choices, and the arrangments that coordinate them.
What two thoughts can economic principles be divided into?
- 1. Choice and Incentives - Individual and Society
- 2. How Economies Work
What is Scarcity?
- The managment of society's resources is important because resources are scarce.
- Scarity means that society has limited resources and therefore cannot produce all the goods and services people wish to have.
- Scarce good is one for which the choice of alternatives requires that another be given up.
- Free good
What are Opportuinity Costs?
To obtain more of one thing, society forgoes te opportuinity of getting the next best things.
Opportuinity cost is the value of the best alternative forgone in making any choice.
What kind of decisions do people make?
Rational or Purposeful
What do people respond to?
People always want to make themselves better off.
Where do rational people think at?
Rational people think at the margin.
Marginal changes are small, incremental adjustments to an existing plan of action.
People make decisions by comparing costs and benefits at the margin.
Why do economies exist?
Because of gains from trade.
- Divisions of labor allows workers to specialize.
- Specialization allows individuals or countries to focus on different tasks and then trade.
- The economy as a whole can produce more when each person specializes in a task and trades with others.
- Reason for college majors and careers.
What do markets move towards?
Markets move towards an equilibrium.
An economic situation is in equlilbrium when no individual would be better off doing something different.
How should resources be used?
Resources should be used efficiently to achieve society's goals.
- Efficiency - when resources are used to make everyone better off and no one worse off.
- Economy is efficient when it is producing maximum gains from trade.
- Usually competes with equity.
What do markets usually lead to?
Markets usually lead to efficiency.
Adam Smith, Invisible Hand Theory
The fact that markets move towards equilibrium allows for market predictions.
What can improve society's welfare when markets don't achieve efficiency?
Government interventions can improve society's welfare when markets don't achieve efficiency.
What is the Economist's Toolkit?
The Scientific Method & Economic Principles
What is the Scientific Method?
Observe > Formulate a Hypothesis > Test the Hypothesis > Accept, reject, or modify the hypothesis > Continue to test the hypothesis, if necessasry.
What are the Economic Principles?
- 1. Generlizations
- 2. Other-things-equal assumption
- 3. Graphical expression
What is Microeconomics?
Branch of economics that focuses on the choices made by individual decision making units and the impacts those choices have on individual markets.
What is Marcoeconomics?
Branch of economics that focuses on the impact of choice on the total, or aggregate, level of economic activity.
What is an Individual's Economizing Problem?
- Limited Income
- Unlimited Wants
- A Budget Line
- Attainable and unattainable options
- Trade-offs and opportuinity costs
- Make the best choice possible
- Change in Income
What is Society's Economizing Problem?
- Scarce Resources
- Entrepreneurial Ability (takes initiatives, makes decisions, innovates, and takes risks)
What is a Production Possibilities Frontier?
Illstrates production choices
- Full Employment
- Fixed Resources
- Fixed Technology
- Two Goods
What does Limited Resouces mean?
Limited Resouces mean a limited output.
At any point in time a full-employment, full-production economy must sacrifice some product X to obatin more of product Y.
What is the Law of Increasing Opportunity Costs?
The amount of other products that must be forgone or sacrificed to obtain 1 unit of a specific product is called the opportunity cost of that good.
What is the graphical representation of the Law of Increasing Oppotunity Cost?
A graph of the production possibilites curve will be CONCAVE - bowed out from the origin.
Economic resources are not completely adaptable to other uses.