Society: 7.

Governments can sometimes

improve market outcomes.
- Allocates people, land, buildings,
and machines to various How the Economy as a whole works
productive tasks.
8. The Standard of Living reflects the
- Decides who will get what.
ability to produce goods and
- Allocation is necessary because
services.
with respect to the demand of
9. Governments can upset the
the goods and services, scarcity
Economic cart.
exists
10. There is a short-term trade-off
Scarcity society has limited resources between Inflation and
and therefore cannot produce all the Unemployment.
goods and services people wish to have
Consumer Theory Maximize
Economics is the study of how society preference (with limited income or time)
manages its scarce resources. How are
Producer Theory Maximize profit (with
resources allocated and who makes the
limited capital)
allocation decisions is the subject of
economics Market place where buyers and sellers
come together to exchange some
Microeconomics is all about scarcity
product or good
Three Fundamental Questions:
Roles of Economists:
- What goods and services should
1. When they are trying to explain
be produced?
the world, they are scientists.
- How to produce those goods
2. When they are trying to change
and services?
the world, they are policymakers.
- Who gets the goods and
services? Positive Statements are statements
that describe the world as it is
Price One key variable in the
(descriptive analysis)
economy
Ten Principles of Economics: Normative Statements are statements
about how the world should be
How people make decisions
(prescriptive analysis)
1. Decision makers face trade-offs.
Graphing Data:
2. All things incur opportunity costs.
3. People are economically y-axis is the independent variable
rational.
4. Incentives matter. x-axis is the dependent variable
5. Trade makes every on better off. Rule one when an independent
6. Free markets are the most variable changes and that variable
efficient way to organize does not appear on the graph, the
economic activity. curve will shift.
Rule two when an independent
variable changes and does appear on
the graph, there would be a movement
on the existing curve.

Circular flow of Money and Goods - is a

model of the economy in which the
major exchanges are represented as
flows of money, goods and services,
etc. between economic agents.

The Economy can produce any

combination on or inside the frontier

Points outside the frontier are not

feasible given the economys resources

Households and firms interact in the

markets for goods and services and in
the markets for the factors of
production.

The inner set of arrows shows the flow of

dollars, and the outer set of arrows
shows the corresponding flow of inputs
and outputs.

Factors of Production:

(a) Labor
(b) Capital
(c) Materials

Production Technology:

(a) Capital Intensity

Production Possibilities Frontier (PPF) a

graph showing the various combinations
of output that the economy can
possibly produce