Econ - Chapter 1 Three Key Economic Ideas 1. People are...

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Chapter 1 Three Key Economic Ideas 1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made on the margin Econ Problem That Every Society Must Solve 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced? Efficiency Vs. Equity (There is a tradeoff between efficiency and equity) 1. Productive Efficiency – the situation in which a good or service is produced at the lowest possible cost 2. Allocative efficiency – when production is accordance with consumer preference 3. Equity – the fair distribution of economic benefits Normative and Positive Analysis 1. Positive Analysis – concerned with what is 2. Normative Analysis – concerned with what ought to be Macro Vs. Micro 1. Microeconomics – study of how households and firms make choices, how they interact in markets, and how the gov attempts to influence their choices 2. Macroeconomics – study of the economy as a whole (inflation, unemployment, economic growth) Economic Terms 1. Opportunity Cost – The highest-valued alternative that must be given up to engage in an activity 2. Innovation – application of an invention 3. Household – consists of all persons occupying a home 4. Factors of Production – labor, capital, human capital, natural resources, entrepreneurial ability 5. Ceteris Paribus – all else equal Chapter 2 Production Possibilities Frontiers and Opportunity Costs 1. Production Possibilities Frontier (PPF) – a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. a. Points on or in the frontier are attainable, the ones on the frontier are efficient and the ones inside the frontier are inefficient b. Points outside the frontier are unattainable given the firm’s current resources c. The frontier expands with more resources and shrinks with less resources 2. Increasing Marginal Opportunity Costs a. Occurs because the more resources already devoted to any activity, the smaller the payoff to devoting additional resources to that activity b. This is why the PPF is bowed out Comparative Advantage and Trade 1. Absolute Advantage – the ability to produce more of a good or service than competitiors, using the same amount of resources
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2. Comparative Advantage – the ability to produce a good or service at a lower opportunity cost than competitiors a. The basis for trade is comparative advantage 3. Individuals, firms, and countries are better off if they specialize in producuing goods and services for which they have a comparative advantage and obtain the other goods and services they need by trading Chapter 3 The Demand Side of the Market 1. Law of Demand – holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease 2. Substitution Effect – the change in the quantity demanded of a good that results from a
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Econ - Chapter 1 Three Key Economic Ideas 1. People are...

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