Professor C.L. Ballard
Fall Semester, 2011
IMPORTANT CONCEPTS FROM THE FIRST PART OF THE COURSE
is the study of how society chooses to use its scarce resources.
When we study
economics, we look at the way in which people use their limited resources to satisfy unlimited
deals with the economy-wide aggregates, such as the overall unemployment
rate, or the overall inflation rate, or the rate of growth for the overall economy.
However, in this
course, we will focus on
, which deals with the behavior of the individual decision-
making units in the economy, such as households and business firms.
In microeconomics, we
concentrate on the ways in which these individual decision-making units make their decisions, and
how they interact with each other in markets.
statements deal with what is, i.e., positive statements are associated with the actual
workings of the economy.
In principle, at least, a positive statement can be shown to be true or
On the other hand, normative
statements deal with what ought to be.
statements are based on value judgments.
This means that it is impossible to prove conclusively
that a normative statement is false.
Reasonable people can look at the same set of positive facts and
reach different normative conclusions, if their values differ.
In an attempt to understand real-world phenomena, economists develop theories.
In any theory,
it is necessary to abstract from some of the vast complexity of reality.
It is often convenient to
focus on one issue at a time, by employing the assumption of ceteris paribus
, which means “all else
Scarcity and Choice, Specialization and Exchange
, but our desires are limitless.
We cannot achieve all desires
simultaneously, so we must
The real cost of choosing one alternative is its opportunity cost.
The opportunity cost of an item
or activity is the value of what has to be given up, in order to get that item or activity.
it is easy to measure opportunity costs in dollars, on the basis of prices that must be paid.
it is important to realize that opportunity costs are not limited to explicit, out-of-pocket costs.
instance, the true opportunity cost of going to college includes the forgone earnings that the student
gives up while he or she is in college.
The production-possibilities frontier
is a graphical representation of the combinations of outputs
that can be produced if resources are used as efficiently as possible.
Scarcity and choice are
implied by the downward slope of the frontier.
To get more of one good when we are on the