Chapter Notes

Chapter Notes - Chapter One Limits, Alternatives, and...

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Chapter One – Limits, Alternatives, and Choices Economics – The social science concerned with how individuals, institutions and society make the optimal (best) choices under conditions of scarcity The Economic Perspective Scarcity and Choice A. Scarce economic resources – limited goods and services B. Scarcity restricts options and demands choices a. “Cant have it all” – must decide what we will have and what we must forgo C. Opportunity costs – to obtain more of one thing, society forgoes the opportunity of getting the next best thing. a. That sacrifice is the opportunity cost of the choice Purposeful Behavior A. Human behavior reflects “rational self-interest” a. Weigh costs and benefits make it rational B. Individuals look for and pursue opportunities to increase their utility a. Utility – the pleasure, happiness, or satisfaction obtained from consuming a good or service C. “Purposeful Behavior” - people make decisions with some desired outcome in mind Marginal Analysis: Benefits and Costs A. Marginal Analysis – comparisons of marginal benefits and marginal costs, usually for decision making a. Marginal – “extra”, “additional”, or “a change in” b. Most choices/decisions involve changes in status quo B. Scarce resources causes marginal costs Theories, Principles, and Models Scientific Method Observing the real-world behavior and outcomes Based on those observations, formulating a possible explanation of cause and effect (hypothesis) Testing the explanation by comparing outcomes of specific events to the outcome predicted by the hypothesis Accepting, rejecting, and modifying the hypothesis, based on these comparisons Continuing to test the hypothesis against the facts. As favorable results accumulate, the hypothesis evolves into a theory. o A very well-tested and widely accepted theory is referred to as an economic law or economic principle Economic principle - A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions. Combinations of such laws or
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principles are incorporated into models, which are simplified representation of how something works, such as a market or a segment of the economy. Principles and models are highly useful in analyzing economic behavior and understanding how the economy operates. They are tools for ascertaining cause and effect (or action and outcomes) within the economic system. Generalizations – Economic principles are generalizations relations to the economic behavior or to the economy itself. They are the tendencies of typical or average consumers, workers, or business firms. Example: “price-quantity principles” Other-Things-Equal-Assumption – (ceteris paribus) The assumption that factors other than those being considered do not change. Economists when constructing theories use this. Graphical Expression -
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Chapter Notes - Chapter One Limits, Alternatives, and...

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