Chapter 1: Limits, Alternatives, and Choices Notes Flashcards
what is economics
The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.
What is the economic perspective?
It involves scarcity and choice, purposeful behavior, and marginal analysis, where individuals and society must make decisions to allocate limited resources.
Why is scarcity important in economics?
Scarcity forces individuals and society to make choices about what to have and what to give up, as resources are limited.
What is opportunity cost?
The value of the next-best (2nd best) alternative that must be forgone to obtain a product or service.
What does purposeful behavior mean in economics?
It means people make decisions with a desired outcome in mind, reflecting rational self-interest, not necessarily selfishness.
What is utility in economics?
Utility is the satisfaction or pleasure derived from consuming a good or service.
What is marginal analysis?
The comparison of marginal (“extra” or “additional”) benefits and marginal costs, usually for decision making.
How is the scientific method used in economics?
By observing behaviors, forming hypotheses, testing them, and developing theories, which may evolve into economic principles.
Why are economic principles considered generalizations?
Because they describe typical behavior for the majority, not necessarily all individuals.
What is the “other-things-equal” assumption?
It’s the assumption that all other variables remain constant when analyzing the effect of a specific factor.
What is the difference between microeconomics and macroeconomics?
Microeconomics focuses on individual consumers and firms, while macroeconomics looks at the economy as a whole.
What is the difference between positive and normative economics?
Positive economics deals with facts and cause-and-effect relationships, while normative economics involves value judgments about what the economy should be.
What is the economizing problem?
people’s wants are unlimited, but resources are limited, forcing choices.
What does a budget line show?
It shows the different combinations of two products a consumer can purchase with a specific income, given the prices of the products.
What are the four categories of economic resources?
land, labor, capital, and entrepreneurial ability.
What does the production possibilities model demonstrate?
A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.
What is the law of increasing opportunity costs?
As production of a good increases, the opportunity cost of producing additional units rises because resources are not equally suited to all uses.
How does economic growth affect the production possibilities curve (PPC)?
Economic growth shifts the PPC outward, allowing more goods and services to be produced.
What happens to an economy operating inside its production possibilities curve?
It indicates unemployment or underutilized resources.
How do specialization and trade affect production possibilities?
They allow a country to consume more than it can produce on its own by focusing on what it produces most efficiently and trading for other goods.
