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CHAPTER 1 OUTLINE I. The Economic Perspective A.) Scarcity and Choice 1.) economic perspective-economic way of thinking 2.

) scarce economic resources-limited goods and services 3.) opportunity costs-amount of other products that must be forgone or sacrificed to produce a unit of a product B.) Purposeful Behavior 1.) utility-pleasure, happiness, or satisfaction obtained from consuming a good/service 2.) economic decisions-purposeful or rational (not chaotic) a.) consumers, business firms, government entities 3.) purposeful behavior-people make decisions with some desired outcome of mind 4.) rational self-interest-increasing wages, rent, interest, or profit (not selfishness) 5.) self-interested behavior-designed to increase personal satisfaction (may be derived) C.) Marginal Analysis: Benefits and Costs 1.) marginal analysis-comparisons of marginal benefits and marginal costs (decision making) II. Theories, Principles, and Models A.) Scientific Method 1.) procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws 2.) economic principle-statement about economic behavior or the economy that enables prediction of the probable effects of certain actions a.) generalizations b.) other-things-equal-assumption-constructing their theories, economists use the ceteris paribus (assumption that factors other than those being considered do not change) c.) graphical expression III. Macroeconomics and Microeconomics

A.) aggregate-collection of specific economic units treated as if they were one unit B. Individuals Economizing Problem economizing problem-need to make choices because economic wants exceed economic means A.) Macroeconomics-examines either the economy as a whole.) avoids value judgments c. household.) subjective feelings about what ought to be IV. theory development. or aggregates (government. its basic subdivision. or industry) C.) normative economics-incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal (policy economics) a. household. clothing.) Attainable and Unattainable Combinations a.come into play in decisions beyond simple buying decisions a. shelter) to luxuries (yachts.) Limited Income B.) attainable-on or inside the budge line b.) Positive and Normative Economics 1. give the products prices 1.) budget constraint-limit that the size of a consumer s income imposes on the ability of that consumer to obtain goods/services 3.) A Budge Line budget line-schedule or curve that shows the different combinations of two products a consumer can purchase with a specific money income.) includes description.) concerns about what is 2.) Choice-evaluate marginal benefits and marginal costs to make choices that maximize satisfaction . and business sectors) 1.) Unlimited Wants-from necessities (food.) Tradeoffs and Opportunity Costs. sports cars) C.) positive economics-focuses on facts and cause/effect relationships a.) unattainable-beyond the budge line 2. perfumes. and theory testing (theoretical economics) b.) Microeconomics-economics concerned with individual units (person. firm.

retail clerk. makes non-routine decisions.) Production Possibilities Tables-lists different combinations of two products that can be produced with a specific set of resources.4. human.) Income Changes V.) labor-physical and mental talents of individuals in producing goods/services (logger. nuclear physicist. mineral and oil deposits.) factors of production.) Resource Categories 1. capital. teacher. and entrepreneurial ability VI. storage. Production Possibilities Model i.) 3. Society s Economizing Problem A.) Production Possibilities Curve-data presented in a production possibilities table C. innovates. forests. assuming full employment B. and bears risks 5. transportation. the opportunity cost of producing an additional unit rises .) consumer goods-satisfy wants directly capital goods-indirectly aiding the production of consumer goods 4. labor.) capital-manufactured aids used in producing consumer goods/services (factory. fixed technology-state of technology (methods used to produce output) is constant iv. and manufactured resources that go into the production of goods and services B. etc.) Scarce Resources 1. fixed resources-quantity and quality of the factors of production are fixed iii. full employment-economy employing all its available resources ii. and water resources) 2.inputs : economic resources: land. two goods-consumer and capital A.) Entrepreneurial Ability-human resource that combines the other resources to produce a product.) land-all natural resources (arable land.) scarce economic resources-natural.) Law of Increasing Opportunity Cost-principle that as the production of a good increases. distribution facilities) not money ---investment-purchase of capital goods a.

) Shape of the Curve-bowed out from the origin of the graph 2.) biases. and biotechnology B.) A Growing Economy 1. and preventative medicine C.1.) Present Choices and Future Possibilities-capital goods.) Optimal Allocation-marginal benefit (MB) = marginal cost (MC) VII. loaded terminology.) Increase in Resource of Supplies a.)Graph-visual representation of the relationship between two variables 1. Graphs and Their Meaning A.) Improvements in Resource Quality 3.) vertical axis-consumption (depends on income) B.) Dependent and Independent Variables .) Five Common Pitfalls to Avoid in Successfully Applying Economic Perspective a. Unemployment.) Direct and Inverse Relationships 1.) A Qualification: International Trade-goods exchanged for goods abroad 1. research and education. communications.) Direct Relationships-positive relationships where two variables change in the same directions 2. post hoc fallacy. Growth and the Future A.) Inverse Relationships-negative relationships where two variables change in opposite directions C.) Advance in Technology-computers.) Economic Rationale-economic resources are not completely adaptable to alternative uses D.) economic growth: a larger total output 2.) horizontal axis-income determining factor 2. and correlation but not causation VIII. fallacy of composition.

variable that changes because of the change in ghe independent variable IX.) Slope of a Line Slope of a straight line-ration of the vertical change (the rise or drop) to the horizontal change (the run) between any two points of a line 1.) Utility is the pleasure. participating in discussion. The value of a square block in New York would have an immense value compared to the same land on the edge of a typical suburb.) Vertical Intercept-point where the line meets the vertical axis C. and infinite and zero slopes B. slopes and measurements units. to skip breakfast to get a few extra minutes of sleep. 5. a=vertical intercept.) Slope of a Nonlinear Curve-changes from one point to another STUDY QUESTIONS 1.) Dependent Variables-cause or source. happiness. it sacrificed other goods and services to make it available. negative slope.) Deciding to come to class. or satisfaction obtained from consuming a good/service. microeconomics f. or studying for other classes.) y=dependent variable. macroeconomics . land. The land in the city has more opportunities as far as revenue generation.1. macroeconomics e. or to make a purchase. meals. x=independent variable D. slopes and marginal analysis. b=slope of line. microeconomics d. and better preparated for an upcoming examination. to attend college. 3. Marginal costs may include lost opportunities for sleep.) a. management resources to produce something else. Society used equipment. microeconomics c.) Opportunity costs-amount of other products that must be forgone or sacrificed to produce a unit of a product. macroeconomics b. 2. It relates to purposeful behavior because they make their decisions based on the outcome. variable changes first 2.) Independent Variables-effect or outcome.) Equation of a Linear Relationship 1. than the same amount of land in a suburb. Marginal benefits of attending class would be the loss of knowledge. Other Things Equal A. If you allocated land in the city. all those revenues would be lost.) positive slope.

etc.5 20 Candy Bars c. The decision of how much of each to buy would involve weighing the marginal benefits and marginal costs of the various alternatives.75 !  . Economic resources fall into four main categories: labor. The slope for the budget line above. factories.. and manufactured inputs used to produce goods and services. The opportunity cost of one more candy bar is ½ of a bag of peanuts. with the resulting goods and services also being referred to as output.7. . The budget line at $30 would be preferable because it would allow greater consumption of both goods. Economic resources are also called factors of production because they are used to produce goods and services. the marginal benefits of moving from alternative C to alternative D are greater than the marginal costs.) and entrepreneurs. They can be found by comparing any two of the consumption alternatives for the two goods. for example. and so forth. with candy bars on the horizontal axis. real capital (machines. Consumption alternatives Goods Candy bars Bags of peanuts A 0 10 B 4 8 C 8 6 D 12 4 E 16 2 F 20 0 b. human. Ba gs of Pe anuts Inc om e = $ 15 20 I nc o me = $30 10 20 40 Ca ndy Bars 8.) Economic resources are the natural. The opportunity cost of one more bag of peanuts is 2 candy bars. until MB=MC is attained). Bags of Peanuts Slope ! 10  . land (natural resources).5 1. d. then this consumer should move to D (and then compare again with E. Note that the figure could also be drawn with bags of peanuts on the horizontal axis. If.5 (= -Pcb/Pbp). The slope of that budget line would be -2. buildings. They are called inputs because they go in to a production process (like ingredients go into a bowl to make a cake). is -0. These opportunity costs are constant.) a.

See curve EDCBA. This means the economy must give up larger and larger amounts of rockets to get constant added amounts of automobiles²and vice versa.)a.) . 14.33 automobiles. The assumption of full employment has been violated. c. To produce beyond the current production possibilities curve this economy must realize an increase in its available resources and/or technology. The opportunity cost of one more automobile is 9/2 = 4. 12. PPC1 shows improved forklift technology. Production moves inward. fewer resources should be allocated to this use. 13.5 forklifts. then productivity should rise and this would shift the curve outward. (d) The curve should shift inward with the destruction of resources (capital). If MC exceeds MB. The assumptions are full employment.10. 11. The resources are more valuable in some alternative use (as reflected in the higher MC) than in this use (as reflected in the lower MB).) The marginal benefit curve is downward sloping.The economy is underutilizing its available resources. (c) The curve should shift outward as more production is possible with existing resources. b. away from the curve.) See the graph for question 1-10.) (a) Assuming better education translates into better work skills. d. MB falls as more of a product is consumed because additional units of a good yield less satisfaction than previous units. PPC3 shows improved technology in producing both products. (b) Should not affect location of curve. Increasing opportunity costs are reflected in the concave-from-the-origin shape of the curve. fixed technology and two goods. The opportunity cost of one more forklift is 2/6 = 1/3 or . fixed supplies of resources. Production outside the curve cannot occur (consumption outside the curve could occur through foreign trade). The optimal amount of a particular product occurs where MB equals MC. MC increases as more of a product is produced since additional units require the use of increasingly unsuitable resource. as determined from the table. PPC2 shows improved auto technology. The marginal cost curve is upward sloping.

000. The line is downward sloping. 0. $20. Saving will be $750 at the $12. $500.000 . The slope shows the amount saving will increase for every $1 increase in income. Equation: S = $-500 + 0. Statements (a) and (c) illustrate direct relationships. $15. .000 .000.$500)/($15.000. Saving column: $-500. the intercept shows the amount of saving (dissaving) occurring when income is zero. Slope = 0. $1.000. Statement (b) illustrates an inverse relationship. $5.1Y (where S is saving and Y is income).500.) Graphs can be used to illustrate the relationship between two sets of data.United States Futu re Goo ds Futu re Goo ds C hina B A Present Goods Presen t Goods CHAPTER 1 APPENDIX 1. The inverse relationship is assuming that everything else remains equal. $10.) Income column: $0. The line is upward sloping.000. Vertical intercept = $-500. A direct relationship is when the two variables change in the same direction.500 income level. An inverse relationship is when the two variables change in opposite directions.$10. $1. 3.000).1 (= $1.