Economics Study Guide - What is economics It is the study...

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What is economics? It is the study of how people and firms decide to use their limited resources to meet our unlimited wants. Market arrangement where buyers and sellers carry out exchange at agreeable terms What is scarcity? Not enough goods to meet our needs (wants>resources) A resource is scarce when it is not freely available – when price >0. What are the 4 factors of production? Resources are the inputs used to produce goods and services Goods and services are scarce because resources are scarce 1. Labor – human effort (physical and mental, time ) Paid wages 2. Natural Resources – renewable and exhaustible resources rent 3. Capital (any good that goes into making another good) – human creations human (knowledge and skill) and physical capital interest 4. Entrepreneurial ability – talent to dream up (entrepreneur = profit-seeking decision maker who starts with an idea then organizes enterprise to bring to life, risk). Profit (means to benefit) What is a good? It is anything that provides satisfaction Utility=satisfaction Something tangible, requires scarce resources to produce, satisfies human wants None of at 0 price=bads Economic decision makers 1. households 2. firms 3. governments 4. ROW Microeconomics—individual economic choices and how markets coordinate choices Scientific method 1. indentify question, define relevant variables 2. Specify assumptions (all else being constant and behavioral assumptions -- All decisions are made using RATIONAL SELF INTEREST maximize benefit minimize cost) 3. Hypothesis (predictions of cause and effect in real world) 4. Test hypothesis Positive statement (reality) VS. Normative statement (opinion/should) Faulty economic analysis -- Association is not causation, fallacy of composition (true for individual not true for group), ignore secondary effects
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Chapter 2 Opportunity cost how are cost and price different? Cost>price Price=accounting cost Whereas cost=accounting price + opportunity cost (the next best alternative you gave up) What is a sunk cost? The money spent is already gone (like a concert ticket) What is the Law of comparative advantage? individual with lower opportunity cost of production should specialize absolute (fewest resources) and comparative (what else those resources could produce, opportunity cost) advantage Specialization of labor 1. takes advantage of individual preferences and natural abilities 2. workers gain more experience 3.
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