Economics Chapter 1 – Economics: Foundations and Models PDF

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Foundations and Models Textbook Summary used to study for the midterm. All notes were needed for the midterm....

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Economics Chapter 1 – Economics: Foundations and Models Economics: The study of the choices consumers, business managers and the government officials (people) make in their efforts to make the best us of the scarce resources in achieving their goals. Also known as a social science because it applied the scientific method to the study of interactions among people Scarcity: we don’t have enough resources to do everything we want to. Economic Models: simplifications of reality used to analyze real-world economic issues 1.1-Three Key Economic Ideas People are rational, People respond to incentives, and optimal decisions are made at the margin (extra or additional) Marginal Analysis: Creating and calculating to know if more products should be made Marginal Benefit extra revenue it gets from new users and existing subscribers Marginal Cost  extra wages, royalties and equipment costs needed Net Benefit  benefit – cost, as long as MB > MC, you can continue to do more. MB=MC stop doing more. 1.2 The Economic Problems All Societies Must Solve Scarcity means we face trade-offs: Doing more of one things means we have to do less of something else Opportunity Cost: the value of what we give up to engage in an activity Three fundamental economic questions to find trade-offs: 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced? Centrally Planned Economy: which an individual or group directly answers the questions Market Economy: Rely on privately owned firms to produce goods and services and to decide how to produce them. A market is all potential buyers and sellers of a good or service as well as the rules that determine how buyers and sellers interact. Mixed Economies: use both elements, mostly all countries function in mixed economies Efficiency and Equity Productive Efficiency: occurs when a good or service is produced possible cost Allocative Efficiency: occurs when a country’s resources are used to produce a mix of goods and services that consumers want Voluntary Exchange: markets tend to be more efficient, it is when an exchange is voluntary, both the buyer and the seller are better off by the transaction or they wouldn’t have agreed to it. This leads to competition to promote allocative efficiency. Inefficiency can arise from external causes Equity: harder to define than efficiency, but involves a fair distribution of economic benefits 1.3 Economic Models To build a model the following steps are done: 1. 2. 3. 4.

Decide on the assumptions to use in developing the model Formulate a testable hypothesis Use economic data to test the hypothesis Revise the model if it fails to explain the economic data well

5. Retain the revised model to help answer similar economic questions in the future. Economists make assumptions: Consumers will buy products that maximize their well-being or satisfaction. Firms act to maximize their profits. Economic Variable: something measurable such as wages paid. Hypothesis: is an economic model a statement about an economic variable that may be either correct or incorrect. A causal relationship (scientific method). Positive Analysis: concerns facts or logic. Positive statements are concerned with what is and can potentially be disproven. Economics is about positive analysis which measures the costs and benefits of different courses of action. Normative Analysis: is what value judgements or what ought to be. 1.4 Microeconomics and Macroeconomics Microeconomics: the study of how individual economic agents make choices, how the choices come together to determine what happens in a single market, and the impact of government interventions on market outcomes.(one firm, one market, one person) Macroeconomics: the study of the economy as a whole (county, province or region). Focuses on topics like inflation, unemployment, and economic growth 1.5 The Language of Economics Production: the process of making goods or services often taken by entrepreneurs Entrepreneur: is someone who operates a business. They often decide what goods/service to product and how to. Invention: is the development of a new good or process for making a good Innovation: Practical application of an invention Technology: a firm’s technology is the processes it uses to turn inputs into outputs. Firm, Company or Business: A firm is an organization that produces a good or service. All words mean same thing. Goods: Tangible items that people want Services: activities done for others Revenue: all the money it receives when it sells good or services Profit: difference between its revenue and costs. Household: Consists of all the people occupying a home to make decisions together. Factors of Production or Economic Resources: Firms use this to produce goods or services. The main factors of production are labor, capital, natural resources, and entrepreneurial ability Capital: financial capital// physical capital – includes stocks and bonds issued by firm, bank accounts and holdings of money. In economics, capital refers to physical capital, which is any manufactured goods (countrywide- capital stock) Human Capital: is the accumulated trainings, skills, and knowledge that a person has....