Exam 1 Study Guide - Unit 1 Econ Test Review Chapter 1 Economics how people allocate their limited resources to satisfy their unlimited wants the study

Unit 1: Econ Test Review Chapter 1: Economics : how people allocate their limited resources to satisfy their unlimited wants; the study of how people make choices. Microeconomics : decision making undertaken by individuals (or households) & by firms. Ex. Pollution, healthcare, crime, education Macroeconomics : The study of the behavior of the economy as a whole (ex. Inflation, taxes, unemployment) Rationality Assumption : the assumption that people do not intentionally make decisions that would leave them worse off; more is better; act in their own self interest in a rational manner. Incentives : costs & benefits (+) commisions, rebates, bonuses; (-) jail, tickets Model : simplified representations of the real world used as the basis for predictions or explanations (predict how people react, not think) Ceteris Paribus Assumption : nothing changes expect the factor(s) being studied Positive economics : purely descriptive statemenst or scientific predictments- statement of what is; “of fact,” true of false, what you learn; conditional statements, ‘will’ ‘if A, then B,’ objective Normative economics : Analysis involving value judgements- a statement of what ought to be; “should, believe, ought” Chapter 2: Scarcity : occurs when the ingredients (resources, inputs) for producing thing that people desire are insufficient to satisfy all wants. NOT a shortage or poverty; “the economic problem” Factors of production : Land (natural resources), Labor (the human resource), physical (machinery) & human (education) capital, entrepreneurship Needs : are objectively basic; wish, want, life saving necessity; water, food shelter Wants : desirable goods people wish to have, unlimited, “needs in excess” Opportunity cost : highest-value, next-best alternative, they must be given up (sacrificed) to attain something or satisfy a want.