Chapter 1 Notes - Chapter 1 The Economic Problem 1.1 How Economists Think Rational behavior is making choices by logically weighing the personal

Chapter 1 Notes - Chapter 1 The Economic Problem 1.1 How...

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Chapter 1: The Economic Problem 1.1 How Economists Think Rational behavior is making choices by logically weighing the personal benefits and costs of available actions, then selecting the most attractive option. Economic problem is having the unlimited wants but limited resources with which to satisfy them. The limited nature of resources-or scarcity-requires that we make choices based on both non-economic factors, such as the needs for security, and economic factors. Economic resources are basic items used in all types of production including natural, capital, and human resources. Natural resources are nature’s contribution to production including land, raw materials, and natural processes. Capital resources (or capital) refers to the real assets of an economy-the processed materials, equipment, and buildings that are used in production. This DOES NOT include financial capital such as stocks or bonds. 2 types of human resources : labor and entrepreneurship. Labor is human effort employed directly in production (i.e. man hours). Entrepreneurship is the initiative, risk-taking, and innovation necessary for production which includes the effort to start or run a business. When a natural resource is employed, its owner receives a rent, which is the payment for supplying the resource. Similarly, providers of capital resources (as well as providers of financial capital such as bonds) receive an income in the form of interest. Economics is the study of how to distribute scarce resources to make choices-divided into micro and macroeconomics. Micro focuses on the behavior of individual participants in various markets. Macro looks at the entire economy as a while focusing on 4 important sectors: households, businesses, government and foreign market. The performance of these sectors determines unemployment rates, general level of prices, and total economic output. Economic models are used to comprehend generalizations about or simplifications of economic reality; also known as laws, principles, or theories. Variables are factors that have measurable values. 2 types: independent and dependent. Independent variables cause changes in another variable. Dependent variables are affected by the independent variable. Economic models are the environment that constitute the variables.
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