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Scarcity
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A situation in which unlimited wants exceed the limited resources available to fulfill those wants
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Trade-offs are
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all arternative choices when making a decision
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opportunity cost
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the most desirable alternative given up as the result of a decision
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3 question society must answer
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- Which foods and services to produce
- How should they be produced
- who gets the goods and services
- How should they be produced
- who gets the goods and services
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Economics
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Study of choices people make to attain their goals
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economic model
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a simplified version of reality used to analyze real-world economic situations
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Assumption made about people
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People are rational
People respond to incentives
Decisions are made at the margin
People respond to incentives
Decisions are made at the margin
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centrally planned economy
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an economy in which the government decides how economic resources will be allocated
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market economy
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Economic decisions are made by individuals or the open market.
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mixed economy
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Most economic decisions result from interaction of buyers and sellers in markets, and government plays a role in allocation of resources
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Efficiency vs. Equity
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Total benefits vs distribution of benefits.
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Which type of economy is more efficient?
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Market
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productive efficiency
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a good or service is produced at the lowest possible cost
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allocative efficiency
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A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
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Voluntary exchange
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a situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction
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Equity
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Fair distribution of economic benefits
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economic variable
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something measurable that can have different values, such as the incomes of doctors
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positive analysis
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Analysis concerned with what is (cause and effect relationship, testable)
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normative analysis
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analysis concerned with what ought to be ("Opinion")
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Microeconomics
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the study of how households and firms make decisions and how they interact in markets
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Macroeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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factors of production
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land, labor, capital, and entrepreneurial ability
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