Exam1 study guide

Exam1 study guide - Individual Choice Everyone has to make...

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Individual Choice Everyone has to make choices about what to do and what not to do. Individual choice is the basic of economics – if it doesn’t involve individual choice, it isn’t economics. Resources are Scarce The reason choices must be made is that resources – anything that can be used to produce something else- are scarce. Individuals are limited in their choices by money and time; economies are limited by their supplies of human and natural resources. Marginal Analysis Many economic decisions involve questions not of “whether” but of “how much?” – how much to spend on some good, how much to produce, and so on. Such decisions must be taken by performing a trade off at the margin – by comparing the costs and benefits of doing a bit more or a bit less. Decisions of this type are called marginal decisions, and the study of them, marginal analysis, plays a central role in economics. Incentives The study of people should make decisions is also a good way to understand actual behavior. Individuals usually exploit opportunities to make themselves better off. If opportunities change, so does behavior: people respond to incentives. Gains from Trade The reason for interaction is that there are gains from trade: by engaging in the trade of goods and services with one another, the members of an economy can all be made better off. Underlying gains from trade are the advantages of specialization, of having indivuals specialize in the tasks they are good at. Economies move toward Equilibrium Economies usually move toward equilibrium – a situation in which no individual can make himself or herself better off by taking a different action. Economies are Efficient An economy is efficient if all opportunities to make someone better off without making others worse off are taken. Resources should be used as efficiently as possible to achieve society’s goals.
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Government Intervention during Market Failure When markets fail and do not achieve efficiency, government intervention can improve society’s welfare. Production Possibility Frontier One important economic model is the production possibility frontier. It illustrates: opportunity cost (showing how much less of one good can be produced if more of the other good is produced), efficiency (an economy is efficient if it produces on the production possibility frontier); and economic growth (an expansion of the production possibility frontier) Comparative Advantage Comparative Advantage explains the source of gains from trade between individuals and countries. Everyone has a comparative advantage in something – some good or service in which that person has a lower opportunity cost than everyone else. Often confused with absolute advantage
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Exam1 study guide - Individual Choice Everyone has to make...

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