Chapter 1: Limits, Alternatives, and Choices Flashcards
What is economics?
the social science concerned with how individuals, institutions, and societies maximize their satisfaction for needs and wants under conditions of scarcity
What is the definition of economics?
the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity
What is marginal analysis?
comparisons of marginal costs (MC) and marginal benefits (MB)
What is the economic perspective?
the economic way of thinking: how economists view things from a unique perspective
What is scarcity?
the limited supply of economic resources needed to make goods and services.
What does scarcity restrict?
options and demand choices
What is opportunity cost?
to obtain more of one thing, society forgoes the opportunity of getting the next best thing.
What does economics assume?
that human behavior reflects “rational self-interest”
What is utility?
the pleasure, happiness, or satisfaction obtained from consuming a good or service
What do consumers allocate to maximize their satisfaction
their time, energy, and money
What is purposeful behavior?
the idea that people make decisions with some desired outcome in mind
Is rational self interest the same thing as selfishness?
no
What does marginal mean?
extra, additional, or a change in
What is always present whenever a choice is made?
an opportunity cost
What does economics rely on?
the scientific method
What is the first step of the scientific method?
observing real-world behavior and outcomes
What is the second step of the scientific method?
formulating a possible explanation of cause and effect (hypothesis)
What is the third step of the scientific method?
testing the hypothesis by comparing outcomes of specific events to the outcome predicted by the hypothesis
What is the final step of the scientific method?
to continue to test the hypothesis against the facts
What is the steps to an economic principle
hypothesis —–> theory ——–> economic principle
What is an economic principle?
a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions
What are theories, principles, and models?
purposeful simplifications
What are economic principles?
generalizations
What is other-things-equal in latin?
ceteris paribus
What is the other things equal assumption
the assumption that factors other than those being considered do not change
What is microeconomics?
the part of economics concerned with decision making by individual customers, workers, households, and business firms
What does macroeconomics examine?
the performance and behavior of the economy as a whole
What is an aggregate?
a collection of specific economic units treated as if they were one unit
What does positive economics focus on?
the facts and cause-and-effect relationships
What does normative economics incorporate?
value judgement about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal.
What is the relationship between positive and normative economics, summarized?
positive economics concerns what is; normative economics concerns what ought to be
What is the economizing problem?
the need to make choices because economic wants exceed economics needs
What does everyone have a finite amount of?
income
What do most people have?
virtually unlimited wants
What does it mean to economize?
to pick and chose goods and services that maximize our satisfaction value given the limitations we face
What is a budget line?
a schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income
What does the budget line show?
a maximization of utility
T/F: Society also faces an economizing problem
True
What are economic resources?
natural, human, and manufactured resources that go into production of goods and services
What are land resources?
all natural resources used in the production process
What are labor resources?
physical actions and mental activities that people contribute to the production of goods and services
What are capital resources?
all manufactured aids used in producing consumer goods and services
What is investment?
spending that pays for the production and accumulation of capital goods
How do capital goods satisfy the consumer goods indirectly?
by aiding the production of consumer goods
What four things does an entrepreneur do?
takes the initiative in combining resources of land, labor, and capital to produce a good or a service, makes the strategic business decisions that set the course of an enterprise, innovates, and bears risks
What are land, labor, capital, and entrepreneurship ability called?
factors of production, or “inputs”
What four things are assumed when drawing a PPC curve?
full employment, fixed resources, fixed technology, and two goods
What are consumer goods?
products that satisfy our wants directly
What are capital goods?
products that satisfy our wants indirectly
What is the generalization of the PPC?
at some point, a fully employed economy must sacrifice some of one good to obtain more of another good
What does the production possibilities curve display?
the different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and fixed technology
What is displayed on the y-axis of a PPC?
Capital goods
What is displayed on the x-axis of a PPC?
consumer goods
What s the law of increasing opportunity costs
the opportunity cost of each additional unit is greater than the cost of the previous one
How is the law of increasing opportunity costs reflected in a PPC?
The shape of the curve
What is the economic rationale behind the law of increasing opportunity costs?
Economic resources are not completely adaptable to alternative uses, so as production increases, it becomes less effective
Where does the optimal amount of activity occur?
where MB = MC
What is the net result of increased supplies of factors of production?
the ability to produce more of consumer goods and capital goods
What 3 things are the economic growth a result of?
increases in supplies of resources, improvements in resource quality, and technological advances
What helps determine the future location of the PPC curve?
an economy’s current choice of positions on its PPC
