Exam 1 Chapter Notes - Sarah Sherr ECO 2023 Principles of...

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Sarah Sherr ECO 2023: Principles of Microeconomics Professor Mark Rush Exam 1: Chapter Notes CHAPTER 1 After studying this chapter, be able to: Define economics and distinguish between micro and macro Explain the two big questions of economics Explain the key ideas that define the economic way of thinking Explain how the economists go about their work as social scientists and policy advisors Economics is… The study of CHOICES and their CONSEQUENCES A fundamental fact that dominates our lives: We want more than we can get. Scarcity: Our inability to get everything we want. Scarcity is universal. Confronts all living things. Social science that studies the choices the individuals, businesses, governments and entire societies make as they cope with scarcity and incentives. What everyone/society can get is limited by the productive resources available. What governments can afford is limited by the taxes they collect. Incentive: a reward that encourages an action or a penalty that discourages one. Two Big Economic Questions o How do choices end up determining what, how (l and, labor, capital, entrepreneurship ), and for whom goods and services are produced? o Do choices made in the pursuit of self-interest also promote the self interest? Land: Gifts of nature Labor: Work time and work effort that people devote to producing goods and services. o The quality of labor depends on human capital (knowledge and skill people obtain from education, training, experience, etc.) Capital: Tools, instruments, machines, etc, used to produce goods and services. Entrepreneurship: Human resource that organizes land, labor, capital and makes all business CHOICES and DECISIONS. IMPORTANT!!! o Land earns rent o Labor earns wages Labor earns the most in the process of production o Capital earns interest o Entrepreneurship earns profit Efficient: If it is not possible to make someone better off without making someone else worse off. Economic Way of Thinking: o A choice is a tradeoff
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o People make rational choices by comparing benefits and costs o Benefit is what you gain from something o Cost is what you must give up to get something o Most choices are “how-much” choices made at the margin. o Choices respond to incentives. Positive Statement: About what is. Can be right or wrong, but can always be backed up by facts.
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