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MICROECONOMICS MIDTERM 1 REVISION:Economics:the study of optimal choices under conditions of scarcity due to unlimited wants & limited resourcesLIMITS, ALTERNATIVES & CHOICESThe economic perspectiveoScarcity & choiceOpportunity cost—because of scarcity of resources trade-off is inevitable; resources have opportunity costoPurposeful behaviorRational self-interest—people look for & exploit opportunities to increase their utilityoMarginal analysisComparing marginal benefit(MB) of an action w/ its marginal cost (MC)oMB=MC optimum level of an activityThe scientific methodoObserving real-world behavior and outcomesoFormulating hypothesis based on observationoTesting the hypothesis by comparing outcomes of specific events to the outcome predicted by the hypothesisoAccepting/rejecting/modifying hypothesis based on comparisonsoContinue testing the hypothesisfavorable results hypothesis is now a theory well tested theoryeconomic law/principleEconomic principlesoGeneralizations—relate to economic behavior & economyoOther-things-equal assumption : assumption that factors other than those being considered do not changeoGraphical expression—economic models are expressed graphicallyMicro vs MacrooMicroSmaller, discrete economics agents & their reactions to changing eventsParticular, individual markets & economic segmentsEx: consumer’s behavior, firms decisionsoMacroWider view of economy & the economic activityEx: unemployment, inflation, national output, ADPositive economics:deals with areas of the subject that are capable of being proven to be correct or notNormative economics:deals w/ areas of the subject that are open to personal opinions and beliefsThe individual economizing problem:the need to make choices because economic wants > economic means Economic resources/ factors of productionoLand:natural resources used to produce goods & services
oLabor:people’s physical & mental talents and efforts that are used to help produce goods and servicesoCapital:human-made resources used to produce goods & services; goods that indirectly satisfy human wantsEx: buildings, machines, equipmentoEntrepreneurial ability:human resource that combines other resources to produce a product, makes non-routine decisions, innovates & bears risksProduction Possibility Curve/frontier (PPC/F)oshows trade-offs facing an economy that produces only 2 goodsoShows the max. quantity of one good that can be produced for any given quantity produced of the otheroIllustrates efficiencyEfficiency :there are no missed opportunities in production—there is no way to produce more of one good without producing less of other goodsoIs a reminder of opportunity costoEconomic growth: economic growth means an expansion of the economy’s production possibilities, the economy can produce more of everythingAffected by factors of production and progress in technology