ECON NOTES PREMIDTERMS - CHAPTER 1 ECONOMIC MODELS TERMS...

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CHAPTER 1: ECONOMIC MODELS TERMS: ECONOMICS- the study of the allocation of scarce resources among alternative uses MICROECONOMICS- The study of the economic choices individuals and firms make and of how these choices create markets MODELS- Simple theoretical descriptions that capture the essentials of how economy works PRODUCTION POSSIBILITY FRONTIER- A graph showing all possible combinations of goods that can be produced with a fixed amount of resources OPPORTUNITY COST- The cost of a good measured by the alternative uses that are foregone by producing it Six Principles of the PPF: 1) Resources are scarce 2) Scarcity involves opportunity costs 3) Opportunity costs are increasing 4) Incentives matter 5) Inefficiency involves real costs 6) Whether markets work well is important SUPPLY-DEMAND MODEL- A model describing how a good’s price is determined by the behavior of individuals who buy the good and of the firms that sell it. DIMINISHING RETURNS- Hypothesis that the cost associated with producing one more unit of a good rises as more of that good is produced EQUILIBRIUM PRICE- The price at which the quantity demanded by buyers of a good is equal to the quantity supplied by sellers of the good TESTING ASSUMPTIONS- Verifying economic models by examining validity of the assumptions on which they are based TESTING PREDICTIONS- verifying economic models by asking if they can accurately predict real-world events POSITIVE-NORMATIVE DISTINCTION- Distinction between theories that seek to explain the world as it is and theories that postulate the way the world should be SUMMARY: - Economics the study of the allocation of scarce resources among alternative uses. Because resources are scarce, choices have to be made on how they will be used. Economists develop theoretical models to explain these choices.
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