Chapter 1 Textbook Notes PDF

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Chapter 1 Notes What is Economics? Economics – the study of how people use their limited resources to satisfy unlimited wants.  

Economics – the study of how a society chooses to use its scarce resources to produce, exchange and consume goods and services.

The center of each definition is the idea that our resources are scarce or limited. Our desires are unlimited; however, we are constrained by the limits on our resources. Therefore, we have to choose.

Fundamental Choices: 1. What to produce a. We cannot have everything that we would like like because resources are scarce b. Most decisions are made by individual households and/or businesses 2. How to produce a. It’s possible to produce goods and services in a wide variety of ways b. Necessary to make choices about how to produce c. These choices are often made by business firms, in a process that involved interactions with workers, and with the owners of machinery, equipment, buildings, energy, materials and land 3. For whom to produce *There is no way to escape these three fundamental choices, because every society must decide what to produce, how to produce, and for whom to produce. Microeconomics – concerned with the behavior of households and business firms, and the way in which they interact with each other in markets Macroeconomics – concerned with the aggregates for the economy as a whole, such as the overall rate of economic growth, the overall rate of unemployment, and the overall rate of inflation.  

Positive Economics Actual workings of the economy Example: “If the minimum wage is raised, there will be an increase in unemployment among teenagers.” o This is a statement of fact, meaning that the statement could be proved as correct or incorrect.

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Normative Economics What it ought to be Example: “It would be immoral for the minimum wage to be anything less than $10 an hour. Therefore, we should raise the minimum wage now.” o This shows a value judgment, and cannot be shown true or false because it is an opinion or what this particular person values.

Economic Model – a stylized representation of some aspect of the real economy  Useful guide to thinking about an economic issue o If the model makes predictions that are pretty close to the mark, then it is a pretty good model Ceteris paribus – the Latin phrase that means “all other things equal”  Example: People who work at dirt, dangerous jobs tend to earn higher wages, all else equal. However, this does not mean that people who work at dirty, dangerous jobs always earn more than people who work in clean, safe jobs.  Wages are determined by many influences, including the skill level.  If we wanted to test the idea, we need to hold constant the skill level of the job. Opportunity Cost – value of the next best alternative  What a person sacrifices when they choose one option over another  Example: The opportunity cost of going to college is the money you would have earned if you worked instead. On one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to cancel out the lost wages. o A choice must be made. It would be an easy decision if you knew the end outcome; however, the risk that you could achieve greater “benefits” (be they monetary or otherwise) with another option is the opportunity cost....