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Study Guide - Chapter 1 Economics examines how individuals...

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Chapter 1 o Economics examines how individuals, institutions, and society make choices under conditions of scarcity o The economic perspective stresses: o Resource scarcity ad the necessity of making choices o The assumption of rational behavior o Comparisons of marginal benefit and marginal cost o Economists use the scientific method to establish economic theories—cause and effect generalizations about the economic behavior of individuals and institutions o Macroeconomics examines the economy as a whole, while microeconomics examines specific units of the economy o Positive economics deals with factual statements (what is); normative economics deals with value judgments (what ought to be). o Because wants exceeds incomes, individuals face an economizing problem; they must decide what to buy and what to forgo o A budget line (budget constraint) shows the various combinations of two goods that a consumer can purchase with a specific money income o Straight line budget constraints imply constant opportunity costs associated with obtaining more of either of the two products o Economists categorize economic resources as land, labor, capital, and entrepreneurial ability o The production possibilities curve illustrates several ideas: o Scarcity of resources is implied by the area of attainable combinations of output lying outside the production possibilities curve o Choice among outputs is reflected in the variety of attainable combinations of goods lying along the curve o Opportunity cost is illustrated by the downward slope of the curve o The law of increasing opportunity cost is implied by the bowed-outward shape of the curve
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