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Introduction
Society has the resources to make goods and services that satisfy our many desires.
However, our economic wants far exceed the productive capacity of our limited resources.
Scarcity means that society has limited resources and therefore cannot produce all the goods and services people want.
When a good is produced, the resources employed can no longer be used to make another good. When a choice is made, another opportunity is passed up
Opportunity cost represents the value of the good, service, or time forgone to obtain something else.
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Purposeful Behavior
Economics assumes that individuals act rationally and in their own self-interest. Individual decisions are purposeful and seek to maximize utility.
Utility is the pleasure, happiness, or satisfaction obtained from consuming a good or service.
Purposeful Behavior
Consumers are purposeful in deciding what goods and services to buy. Business firms are purposeful in deciding what products to produce and how. Governmental entities are purposeful in deciding what services to provide and how to finance them.
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Individuals make rational decisions such that the marginal benefit exceeds (or equals) the marginal cost.
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
You find a standard model that you like but you are considering additional features (a sunroof, leather interior, heated seats and alloy wheels). As long as the marginal benefit (greater satisfaction) exceeds the marginal cost (extra expenses) of the additional features, you will add them.
the observation of behavior and outcomes, the formulation of a possible explanation of cause and effect (hypothesis) based on the observation, the testing of this explanation by comparing actual and predicted outcomes, and the acceptance, rejection or modification of the hypothesis. the continual testing of the hypothesis.
are generalizations, use the ceteris paribus, or other-things-equal assumption, and can be expressed graphically.
Macroeconomics looks at the economy as a whole or its major components of the economy.
Economic Problem
Both individuals and society face an economic problem: They need to make choices because wants exceed means.
Points on or inside the line are attainable and can be purchased. (A, B, C, and D) However, points on the line Unattainable (A, C, and D) exhaust the 6 A E allotted budget and maximize B C utility whereas points inside 3 the line do not. (B) Attainable D Points beyond the line are 0 2 6 12 unattainable. (E) Quantity
of books
Quantity Of DVDs
Moving from point A to point C means giving up 3 DVDs to get 6 books, or 1 DVD for 2 books. Moving from point C to point D means giving up 3 more DVDs to get 6 more books. Constant tradeoff is 1 extra DVD = 2 books (or DVD = 1 book)
If income increases, the budget line shifts to the right. A decrease in income will shift the budget line to the left.
Resource Categories
1. Land include natural resources used in the production process, such as rivers, minerals, and forests. 2. Labor includes physical and mental talents of individuals used to produce goods and services.
Resource Categories
3. Capital includes human-made resources used in producing consumer goods and services such as machinery, tools, and warehouse facilities.
4. Entrepreneurial Ability is human talent that combines the other resources to produce products, make strategic decisions and bear risks.
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Resource Categories
Because land, labor, capital, and entrepreneurial ability are combined to produce goods and services, they are also known as factors of production or simply inputs.
Full employment Fixed resources Fixed technology Two goods: consumer goods and capital goods
Each combination of two products (i.e. consumer goods and capital goods) can be plotted in a graph to create a production possibilities curve (PPC).
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Points on the PPC are considered attainable. They employ all available resources and technology and operate at full employment. Points lying inside the PPC are attainable but represent less total output. Points lying beyond the PPC are unattainable given the current technology and resources.
For example, to produce more food, society must give up larger amounts of manufacturing equipment.
Optimal Allocation
The optimal allocation depends on marginalism; any economic activity should be expanded as long as marginal benefits exceeds the marginal costs (MB > MC) and should be reduced if marginal benefit is less than marginal costs (MB < MC). Ideally, the optimal amount of activity occurs where MB = MC.
Optimal Allocation
The PPC may also shift outward over time depending on an economys present choices and future possibilities. The rate of economic growth depends on the choices society makes today. A focus on future goods production, such as the capital stock, that incorporate technological advances and increases the quality and quantity of resources results in greater economic growth.