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test 1 - Chapter 1 What is Economics Economics the study of...

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Chapter 1: What is Economics? Economics : the study of how people make choices when allocating limited resources in response to their unlimited wants Limited/Scarce Resources o FOP Land: all natural resources (land, oil, timber, minerals) Payment: Rent Labor: human resources (physical and mental work) Payment: Wages Limited because of limited population Capital: manufactured resources used for production (machines, facilities, buildings, furniture in dr. office) Payment: Interest Unlimited Wants (Desires) o Wants (unlimited) E°Biological Needs (limited) o Economic Goods (Wants) : (=goods and services): desirable and scarce At a zero price, people want more economic goods than what are available Free Goods : desirable, but not scarce (don’t cost anybody anything) Scarcity (a central economic problem) o Cannot be eliminated o With limited resources, we could never completely fulfill our wants o Limited resources (3 FOPs) & Unlimited Wants (economic goods) scarcity problem to deal with make choices Three Basic Economic Questions W hat to produce? What products will be produced and in what quantities? Ho w to produce? Hoe to combine resources to produce? What technology to use? For w hom to produce? Who will consume the final products? (Income Distribution) Microeconomics o Focuses on the individual components of the economy Individual households (H/Hs): consumers, resource providers (labor) Individual business firms (B/Fs): sellers, employees Individual Industries: composed of firms producing similar products (fast food, automobile industry) o Studies the interaction of H/Hs and B/Fs in markets Price Theory: main component of microeconomics) o Studies the effects of something on the decisions of individual H/Hs and B/Fs, on the employment or production of a(n) particular industry on the price of production of a product Macroeconomics o Focuses on aggregate economic activities Is the study of the economy as a whole across many industries o Examines nation-wide (economy-wide) Aggregate variables National output level (GDP, GNP) Economic growth rate
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General price level (price indexes) Inflation rate (un)employment of a nation Studies the effect of something on aggregate variables (Exports/imports of a nation (national debt)) Examples: Lowering interest rate on the production of US construction industry (micro) on US GDP (macro) Gulf War on world price of crude oil (micro) NAFTA on the employment of Mexican textile industry (micro) Mexican employment (macro) Positive Analysis o Gives positive statements about what was, is, or will be o Depends on the facts, not on personal opinion, not on personal value judgments o Don’t have to be true, but they are subject to possible verification by the facts o The relationship between two economic variables o Example: government funding will effect employment Normative Analysis o Gives normative statements about what should be or what ought to be o
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