Econ1 - Chapter 1 Economics Foundations and Models Scarcity...

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Scarcity- a situation in which unlimited wants exceed the limited resources available to fulfill those wants Economics- the study of the choices people make to attain their goals, given their scarce resources Economic models- a simplified version of reality used to analyze real-world economic situations Three Key Economic Ideas Market- a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade o 1. People are rational o 2. People respond to economic incentives o 3. Optimal decisions are made at the margin People Are Rational Economists assume people are rational They assume consumers and firms use all available information as they act to achieve their goals Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs People Respond to Economic Incentives Consumers and firms consistently respond to economic incentive Optimal Decisions Are Made at the Margin Economists use the word marginal to mean “extra” or “additional” Marginal benefit and marginal cost Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost (where MB=MC) Marginal analysis- analysis that involves comparing marginal benefits and marginal costs The Economic Problem That Every Society Must Solve Economic problem that it has only a limited amount of economic resources and so can produce only a limited amount of goods and services Trade-offs- the idea that because of scarcity, producing more of one good or service means producing less of another good or service Opportunity cost- the highest-valued alternative that must be given up to engage in an activity
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This note was uploaded on 02/21/2012 for the course EC 101 taught by Professor Idson during the Fall '08 term at BU.

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Econ1 - Chapter 1 Economics Foundations and Models Scarcity...

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