Professor C.L. Ballard
Fall Semester, 2007
IMPORTANT CONCEPTS FROM THE FIRST PART OF THE COURSE
is the study of how society chooses to use its scarce resources.
When we study economics, we
look at the way in which people use their limited resources to satisfy unlimited wants.
deals with the economy-wide aggregates, such as the overall unemployment rate, or the
overall inflation rate, or the rate of growth for the overall economy.
However, in this course, we will focus on
, which deals with the behavior of the individual decision-making units in the economy, such as
households and business firms.
In microeconomics, we concentrate on the ways in which these individual
decision-making units make their decisions, and how they interact with each other in markets.
statements deal with what is, i.e., positive statements are associated with the actual workings of the
In principle, at least, a positive statement can be shown to be true or false.
On the other hand,
statements deal with what ought to be.
Thus, normative statements are based on value judgments.
This means that it is impossible to prove conclusively that a normative statement is false.
can look at the same set of positive facts and reach different normative conclusions.
In an attempt to understand real-world phenomena, economists develop theories.
In any theory, it is
necessary to abstract from some of the vast complexity of reality.
It is often convenient to focus on one issue at
a time, by employing the assumption of ceteris paribus
, which means “all else equal”.
Scarcity and Choice, Specialization and Exchange
, but our desires are endless.
We cannot achieve all desires simultaneously, so we must
The real cost of choosing one alternative is its opportunity cost.
The opportunity cost of an item is the value
of what has to be given up, in order to get the item.
Sometimes, it is easy to measure opportunity costs in
dollars, on the basis of prices that must be paid.
However, it is important to realize that opportunity costs are
not limited to explicit, out-of-pocket costs.
For instance, the true opportunity cost of going to college includes
the forgone earnings that the student gives up while he or she is in college.
The production-possibilities frontier
represents graphically the combinations of outputs that can be
produced if resources are used as efficiently as possible.
Scarcity and choice are implied by the downward
slope of the frontier.
To get more of one good when we are on the frontier, we must give up some of another
The negative of the slope of the production-possibilities frontier is equal to the opportunity cost of the
good on the horizontal axis, in terms of the good on the vertical axis.
The opportunity cost of the good on the
horizontal axis (in terms of the good on the vertical axis) is the reciprocal of the opportunity cost of the good on