Summary Background Information Lecture 1

Summary Background Information Lecture 1 - Summary...

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Summary Background Information Lecture 1 1. Economics: the study of how people make choices under conditions of scarcity and of the results of those choices for society 2. Scarcity Principle (also called the No-Free-Lunch Principle): although we have boundless needs and wants, the resources available to us are limited, so having more of one good thing usually means having less of another; hence the cliché, ‘There ain’t no such thing as a free lunch’, abbreviated with TANSTAAFL 3. Cost-Benefit Principle: an individual (or a firm, or a society) should take an action if, and only if, the extra benefits from taking that action are at least as great as the extra costs; model of how an idealized rational individual would choose among competing alternatives 4. Rational person: if a person follows the cost benefit principle; someone with well-defined goals, who fulfils those goals as the best she can 5. Economic surplus: the economic surplus from taking any action is the benefit of taking that action minus its costs 6. Opportunity cost: the opportunity cost of an activity is the value of the next best alternative that must be forgone in order to undertake the activity (example: production of nuts and coffee; OC(nuts) = loss in coffee/gain in nuts; OC(coffee) = loss in nuts/gain in coffee) 7. Absolute advantage: one person has an absolute advantage over another if an hour spent in performing a task earns more that the other person can earn in an hour at the task 8. Comparative advantage: one person has a comparative advantage over another in a task if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost 9. Gains from exchange are possible if trading partners have comparative advantages in producing different goods and services (maximum production achieved if each person specializes in producing the good or service in which he or she has the lowest opportunity cost) 10. Production possibilities curve: a graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good (summarizes the various combinations of production) 11. Attainable point: any combination of goods that can be produced using currently available resources 12. Unattainable point:
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