CHAPTER 1 OUTLINE I. The Economic Perspective A.) Scarcity and Choice 1.) economic perspective-economic way of thinking 2.

) scarce economic resources-limited goods and services 3.) opportunity costs-amount of other products that must be forgone or sacrificed to produce a unit of a product B.) Purposeful Behavior 1.) utility-pleasure, happiness, or satisfaction obtained from consuming a good/service 2.) economic decisions-purposeful or rational (not chaotic) a.) consumers, business firms, government entities 3.) purposeful behavior-people make decisions with some desired outcome of mind 4.) rational self-interest-increasing wages, rent, interest, or profit (not selfishness) 5.) self-interested behavior-designed to increase personal satisfaction (may be derived) C.) Marginal Analysis: Benefits and Costs 1.) marginal analysis-comparisons of marginal benefits and marginal costs (decision making) II. Theories, Principles, and Models A.) Scientific Method 1.) procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws 2.) economic principle-statement about economic behavior or the economy that enables prediction of the probable effects of certain actions a.) generalizations b.) other-things-equal-assumption-constructing their theories, economists use the ceteris paribus (assumption that factors other than those being considered do not change) c.) graphical expression III. Macroeconomics and Microeconomics

A.) Macroeconomics-examines either the economy as a whole, its basic subdivision, or aggregates (government, household, and business sectors) 1.) aggregate-collection of specific economic units treated as if they were one unit B.) Microeconomics-economics concerned with individual units (person, household, firm, or industry) C.) Positive and Normative Economics 1.) positive economics-focuses on facts and cause/effect relationships a.) includes description, theory development, and theory testing (theoretical economics) b.) avoids value judgments c.) concerns about what is 2.) normative economics-incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal (policy economics) a.) subjective feelings about what ought to be IV. Individuals Economizing Problem economizing problem-need to make choices because economic wants exceed economic means A.) Limited Income B.) Unlimited Wants-from necessities (food, clothing, shelter) to luxuries (yachts, perfumes, sports cars) C.) A Budge Line budget line-schedule or curve that shows the different combinations of two products a consumer can purchase with a specific money income, give the products prices 1.) Attainable and Unattainable Combinations a.) attainable-on or inside the budge line b.) unattainable-beyond the budge line 2.) Tradeoffs and Opportunity Costs- come into play in decisions beyond simple buying decisions a.) budget constraint-limit that the size of a consumer s income imposes on the ability of that consumer to obtain goods/services 3.) Choice-evaluate marginal benefits and marginal costs to make choices that maximize satisfaction

4.) Income Changes V. Society s Economizing Problem A.) Scarce Resources 1.) scarce economic resources-natural, human, and manufactured resources that go into the production of goods and services B.) Resource Categories 1.) land-all natural resources (arable land, forests, mineral and oil deposits, and water resources) 2.) labor-physical and mental talents of individuals in producing goods/services (logger, retail clerk, teacher, nuclear physicist, etc.) 3.) capital-manufactured aids used in producing consumer goods/services (factory, storage, transportation, distribution facilities) not money ---investment-purchase of capital goods a.) consumer goods-satisfy wants directly capital goods-indirectly aiding the production of consumer goods 4.) Entrepreneurial Ability-human resource that combines the other resources to produce a product, makes non-routine decisions, innovates, and bears risks 5.) factors of production- inputs : economic resources: land, capital, labor; and entrepreneurial ability VI. Production Possibilities Model i. full employment-economy employing all its available resources ii. fixed resources-quantity and quality of the factors of production are fixed iii. fixed technology-state of technology (methods used to produce output) is constant iv. two goods-consumer and capital A.) Production Possibilities Tables-lists different combinations of two products that can be produced with a specific set of resources, assuming full employment B.) Production Possibilities Curve-data presented in a production possibilities table C.) Law of Increasing Opportunity Cost-principle that as the production of a good increases, the opportunity cost of producing an additional unit rises

1.) Shape of the Curve-bowed out from the origin of the graph 2.) Economic Rationale-economic resources are not completely adaptable to alternative uses D.) Optimal Allocation-marginal benefit (MB) = marginal cost (MC) VII. Unemployment, Growth and the Future A.) A Growing Economy 1.) Increase in Resource of Supplies a.) economic growth: a larger total output 2.) Improvements in Resource Quality 3.) Advance in Technology-computers, communications, and biotechnology B.) Present Choices and Future Possibilities-capital goods, research and education, and preventative medicine C.) A Qualification: International Trade-goods exchanged for goods abroad 1.) Five Common Pitfalls to Avoid in Successfully Applying Economic Perspective a.) biases, loaded terminology, fallacy of composition, post hoc fallacy, and correlation but not causation VIII. Graphs and Their Meaning A.)Graph-visual representation of the relationship between two variables 1.) horizontal axis-income determining factor 2.) vertical axis-consumption (depends on income) B.) Direct and Inverse Relationships 1.) Direct Relationships-positive relationships where two variables change in the same directions 2.) Inverse Relationships-negative relationships where two variables change in opposite directions C.) Dependent and Independent Variables

1.) Dependent Variables-cause or source; variable changes first 2.) Independent Variables-effect or outcome; variable that changes because of the change in ghe independent variable IX. Other Things Equal A.) Slope of a Line Slope of a straight line-ration of the vertical change (the rise or drop) to the horizontal change (the run) between any two points of a line 1.) positive slope, negative slope, slopes and measurements units, slopes and marginal analysis, and infinite and zero slopes B.) Vertical Intercept-point where the line meets the vertical axis C.) Equation of a Linear Relationship 1.) y=dependent variable, a=vertical intercept, b=slope of line, x=independent variable D.) Slope of a Nonlinear Curve-changes from one point to another

STUDY QUESTIONS 1.) Opportunity costs-amount of other products that must be forgone or sacrificed to produce a unit of a product. Society used equipment, land, management resources to produce something else, it sacrificed other goods and services to make it available. The value of a square block in New York would
have an immense value compared to the same land on the edge of a typical suburb. The land in the city has more opportunities as far as revenue generation, than the same amount of land in a suburb. If you allocated land in the city, all those revenues would be lost.

2.) Utility is the pleasure, happiness, or satisfaction obtained from consuming a good/service. It relates to purposeful behavior because they make their decisions based on the outcome. 3.) Deciding to come to class, to skip breakfast to get a few extra minutes of sleep, to attend college, or to make a purchase. Marginal benefits of attending class would be the loss of knowledge, participating in discussion, and better preparated for an upcoming examination. Marginal costs may include lost opportunities for sleep, meals, or studying for other classes. 5.) a. macroeconomics b. microeconomics c. microeconomics d. macroeconomics e. microeconomics f. macroeconomics

7.) a. Consumption alternatives

Goods Candy bars Bags of peanuts A 0 10 B 4 8 C 8 6 D 12 4 E 16 2 F 20 0

b. The slope for the budget line above, with candy bars on the horizontal axis, is -0.5 (= -Pcb/Pbp). Note that
the figure could also be drawn with bags of peanuts on the horizontal axis. The slope of that budget line would be -2. The opportunity cost of one more candy bar is of a bag of peanuts. The opportunity cost of one more bag of peanuts is 2 candy bars. These opportunity costs are constant. They can be found by comparing any two of the consumption alternatives for the two goods.
Bags of Peanuts

Slope ! 10

 .75 !  .5 1.5

20

Candy Bars

c. The decision of how much of each to buy would involve weighing the marginal benefits and
marginal costs of the various alternatives. If, for example, the marginal benefits of moving from alternative C to alternative D are greater than the marginal costs, then this consumer should move to D (and then compare again with E, and so forth, until MB=MC is attained).

d. The budget line at $30 would be preferable because it would allow greater consumption of both goods.
Ba gs of Pe anuts Inc om e = $ 15

20 I nc o me = $30

10

20

40

Ca ndy Bars

8.) Economic resources are the natural, human, and manufactured inputs used to produce goods and services. Economic resources fall into four main categories: labor, land (natural resources), real capital (machines, factories, buildings, etc.,) and entrepreneurs. Economic resources are also called factors of production because they are used to produce goods and services. They are called inputs because they go in to a production process (like ingredients go into a bowl to make a cake), with the resulting goods and services also being referred to as output.

10.)a. See curve EDCBA. The assumptions are full employment, fixed supplies of resources, fixed technology
and two goods.

b. The opportunity cost of one more automobile is 9/2 = 4.5 forklifts. The opportunity cost of one more forklift is 2/6 = 1/3 or .33 automobiles, as determined from the table. Increasing opportunity costs are reflected in the concave-from-the-origin shape of the curve. This means the economy must give up larger and larger amounts of rockets to get constant added amounts of automobilesand vice versa. c.The economy is underutilizing its available resources. The assumption of full employment has been violated. d. Production outside the curve cannot occur (consumption outside the curve could occur through foreign trade). To produce beyond the current production possibilities curve this economy must realize an increase in its available resources and/or technology.

11.) The marginal benefit curve is downward sloping, MB falls as more of a product is consumed
because additional units of a good yield less satisfaction than previous units. The marginal cost curve is upward sloping, MC increases as more of a product is produced since additional units require the use of increasingly unsuitable resource. The optimal amount of a particular product occurs where MB equals MC. If MC exceeds MB, fewer resources should be allocated to this use. The resources are more valuable in some alternative use (as reflected in the higher MC) than in this use (as reflected in the lower MB).

12.) (a) Assuming better education translates into better work skills, then productivity should rise and
this would shift the curve outward. (b) Should not affect location of curve. Production moves inward, away from the curve. (c) The curve should shift outward as more production is possible with existing resources. (d) The curve should shift inward with the destruction of resources (capital).

13.) See the graph for question 1-10. PPC1 shows improved forklift technology. PPC2 shows improved auto
technology. PPC3 shows improved technology in producing both products.

14.)

United States Futu re Goo ds Futu re Goo ds

C hina

B A Present Goods Presen t Goods

CHAPTER 1 APPENDIX 1.) Graphs can be used to illustrate the relationship between two sets of data. An inverse relationship is when the two variables change in opposite directions. The line is downward sloping. A direct relationship is when the two variables change in the same direction. The line is upward sloping. Statements (a) and (c) illustrate direct relationships. Statement (b) illustrates an inverse relationship. The inverse relationship is assuming that everything else remains equal. 3.) Income column: $0; $5,000; $10,000, $15,000; $20,000. Saving column: $-500; 0; $500; $1,000;
$1,500. Slope = 0.1 (= $1,000 - $500)/($15,000 - $10,000). Vertical intercept = $-500. The slope shows the amount saving will increase for every $1 increase in income; the intercept shows the amount of saving (dissaving) occurring when income is zero. Equation: S = $-500 + 0.1Y (where S is saving and Y is income). Saving will be $750 at the $12,500 income level.