Chapter 1: Limit, Alternatives, and Choices Flashcards
What is opportunity cost?
The value of the best alternative forgone due to an action taken
What is purposeful behavior in terms of economics?
Economists assume that people are rational, weighing costs and benefits of alternatives
What is scarcity and choices in terms of economics?
If there were no scarcity, there would be no need to economize and therefore no need to make choices
What is marginal analysis?
- Marginal means extra
- We will choose to do something if the marginal benefit is greater than the marginal cost
What are economic theories?
Statements about economic behavior or the economy that enable prediction of the likely effects of certain actions
What does ceteris paribus mean?
“All other variables constant”… necessary assumption for isolating the effect of one variable on the other variable
What does microeconomics focus on?
Decision making by individuals
What does macro economics focus on?
The economy as a whole or its basic subdivisions
What is a budget line?
A schedule showing combinations of the two goods the individual can afford
What does the downward slope of the budget line mean?
It reflects the fact that we have limited income and trade-offs among goods are needed (CONSTRAINT)
2 Reasons for a budget line shift?
1) income doubles
2) both prices have dropped by 50%
2 Reasons for a budget line pivot:
1) price of DVDs has dropped by 50%
2) both income and price of books have doubled
What does the slope of the budget line indicate?
The trade off when purchasing items
4 factors of production (or input)
land, labor, capital, entrepreneurial ability
What is the Production Possibilities Curve (PPC)?
Shows the combinations of two goods that can be produced with a given set of resources and technology
What does the downward sloping production possibilities curve indicate?
Constraint, society has limited resources
What do the points on the PPC mean?
Attainable production as long as the economy uses all its available resources
What do the points inside the PPC mean?
Attainable bu inefficient production because they reflect less total output than points on the PPC
What does the slope of the PPC tell us?
It measures the opportunity cost of producing once more unit of the good on the horizontal axis (rate of tradeoff)
Why is there a law of increasing opportunity cost?
Because economic resources are not completely adaptable to alternative uses and hence different opportunity costs are involved in their employment
What is another name of the law of increasing opportunity cost?
The low hanging fruit principle
What two pieces of information do economic decisions center on?
Comparison of marginal benefits and marginal costs
Whet should economic activity expand? (in terms of MB and MC)
As long as MB > MC
When should economic activity be reduced?
If MC > MB
Where does the optimal amount of activity occur on the PPC?
Where MB = MC
What effect does unemployment have on the PPC?
Producing within the curve….underutilizing resources
3 Instances of economic growth (indicted by outward shift of PPC)
1) increases in the quantity of available resources
2) increases in the quality of available resources
3) advances in technology
