microecon study guide 1

microecon study guide 1 - Chapter 1 Scarcity Microeconomics...

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Chapter 1 Scarcity Microeconomics vs. macroeconomics Factors of production o Land-earns rent o Labor-earns wages o Capital-earns interest o Entrepreneurship- earns profit When you make a choice, there is a tradeoff Big tradeoff- tradeoff between equality and efficiency Choices bring change o How much of our income to consume and how much to save o How much effort to devote to education and training o How much effort to devote to research and the development of new products and production methods Opportunity cost- highest valued alternative that we must give up to get it Compare the benefit of a little more of something with its cost- making a choice at the margin Marginal benefit- benefit that arises from an increase in an activity Marginal cost- cost of an increase in an activity When we make a choice we respond to incentives A system of laws that protect private property and markets that enable voluntary exchange are the fundamental institutions that promote social interest Economists predict changes in choices by studying incentives Positive statements o About what it is o Can be tested Normative statements o About what something ought to be o Can’t be tested Economic model- description of some aspect of the economic world that includes only those features that are needed for the purpose at hand Three ways economists try to disentangle cause and effect o Natural experiment o Statistical investigation o Economic experiment Economics as a policy tool o Personal economic policy o Business o Government Economists evaluate the marginal benefits and marginal costs and try to find the solution that brings the greatest available gain An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purposes at hand The income earned by the people who sell FOP land is called rent Ignoring details in an economic model does not make it inadequate
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Chapter 2 Production possibilities frontier- boundary between those combinations of goods and services that can be produced and those that cannot PPF illustrates scarcity because we cannot attain the points outside the frontier Production efficiency- if we produce goods and services at lowest possible costs Resources are unused when they are idle but could be working Resources are misallocated when they are assigned to tasks for which they are not the best match Opportunity cost- decrease in the quantity produced of one good divided by the increase in Opportunity cost increases as the quantity of a good increases PPF is bowed outward because resources are not all equally productive in all activities Allocative efficiency- when goods and services are produced at lowest possible cost and in the quantities that provide the greatest possible benefit The marginal cost of a good is the opportunity cost of producing one more unit of it The most you are willing to pay for something measures its marginal benefit
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microecon study guide 1 - Chapter 1 Scarcity Microeconomics...

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