Chapter 1, Limits, Alternatives and Choices
Economics is the social science concerned with how individuals make choices under the condition of
scarcity.
Economic perspective is the viewpoint that envisions individuals making rational decisions by
comparing the marginal benefits and marginal cost of their action.
Scarcity means we have limited goods and services.
Opportunity cost is the value of the good or the time forgone to obtain something else.
Purposeful behavior
The utility is the power of satisfaction that a good service has. The main point of purposeful behavior
is that people do not make perfect choices, they make choices based on the desired outcome they have
in mind. Self-interested behavior is simply behavior designed to increase personal satisfaction.
Marginalism: Comparing Benefits and Costs
This comparison is called the marginal analysis. Every option either changes the status quo or not. To
make a choice rationally we weigh the cost and benefits of the change. A positive would be if the
marginal benefit exceeds the marginal cost.
In this world of scarcity, the opportunity cost of forgoing something else has to be included in the
marginal cost.
Theories, Principles and Models
Economists develop theories based on behavior. They use these theories along with principles to
predict the effects of certain actions, purposeful simplifications. They are used to explain cause and
effect within the economic system.
Principles are generalizations of groups. Economics holds the principal to the ceteris paribus
assumption, also known as the other-things-equal assumption. This means that every variable not
mentioned doesn’t influence the subject.
Micro vs macroeconomics
Microeconomics focuses on decision-making behavior by individuals. Whereas with macroeconomics
we see the economy as a whole. We make aggregates to declare major changes.
Individuals’ Economic Problem
The need for individuals to make choices because their wants exceed their needs is called an economic
problem. We have a limited income but have unlimited wants. Within these wants, we can distinguish
between necessities and luxuries. But since we have a limited income we have to choose the goods
and services that maximize our satisfaction.
,Budget Line
We can make different combinations of two products a
customer can purchase with a specific amount of money.
The budget line visualizes these combinations in a graph.
If you were to spend all the money we call it an attainable
combination. However, if there is money left over it’s called
an unattainable combination.
The choice between good A and good B is called a
trade-off. With every trade-off comes a constant opportunity
cost. This means that the opportunity cost for every other
good stays the same.
Society’s Economic Problem
The society also has limited economic resources. These resources contain of:
- Land, all the natural resources used in the production process.
- Labor, all the work of people that goes into the production.
- Capital, all the manufactured aids necessary for production.
- Entrepreneurial Ability, responsible for combining the other resources.
Production Possibilities Model
We can make a difference between consumer goods and capital goods. Consumer goods directly
satisfy human wants. Capital goods are items that are used to produce
other goods, so they indirectly satisfy human wants.
The budget line of a society is called a production possibilities curve.
This again shows us that scarce resources prohibit us from having more
of both goods. Society must choose among alternatives, having more
of option A always means having less of option B. Points lying beyond
the curve are unattainable, shown as X.
Law of Increasing Opportunity Costs
This law means that the more of a product that society produces, the
greater the opportunity cost of obtaining an extra unit. This is shown in
the curve. The slope of the production possibilities curve becomes
steeper as we move from top to bottom.
The law is based on the fact that economic resources are not completely adaptable to alternative uses.
This is called economic rationale.
The optimal allocation lies where the marginal benefits meet the marginal cost. Also known as
MB=MC.
, Unemployment, Growth and the Future
With unemployment, our economy is falling short of various maximum combinations of production.
To show this in the possibility grave a point is shown within the curve as A.
Over time resource supplies change. The net result of these increases is the ability to produce more of
both consumer goods and capital goods. Over time our economy will have achieved economic growth
in the form of expanded potential output, economic growth. This means that the curve will shift
outward and to the right.
Economic growth is the result of increases in supplies of resources, improvements in resource quality,
and technological advances. With a result of greater output.
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