The fundamental of economic problem is scarcity: there are not enough resources to produce everything people want and need. It also means that society faces tradeoffs when making choices about how to use resources
4 types of resources: 1. Land and other natural resources 2. Labor services 3. Capital (structures and equipment) 4. Entrepreneurial ability.
Microeconomics studies the decisions of individuals, households, and firms, focusing on the interaction of buyers and sellers in specific markets and the production decisions of firms.
Macroeconomics studies economic aggregates, such as the national unemployment rate, the rate of inflation, and economy growth rate, and macro policies to promote full employment, price stability and a healthy rate of economic growth
Positive economics: deals with the statement about what is, which can be tested against facts. Eg: many low-income families do not have heath insurance.
Normative economics deals with the statements of what should be and requires value judgments. Eg: Government should do something to help low-income families obtain health insurance. Economists develop and test positive statements and often make normative statements in the form of policy recommendation.
Economists are concerned with observing behavior, understanding relationships, predicting outcomes, and identifying solutions to economic problems.
Ceteris parisbus assumption: used to isolate the relationship between 2 variables by holding other influences on the relationship constant.
Economics model are designed to simplify the reality in an attempt to explain real-world relationships and predict outcomes.
Fallacy of false cause (post hoc fallacy or association-causation issue): one event follows another; the first must have caused the second.
Fallacy of divisions: what is good for all, must be good for the parts.
Fallacy of composition: what is true for the parts is also true for the whole.
Circular flow model: shows the interaction of participants in a market economy and can be used to help explain microeconomic relationships and macroeconomic measures.
Business sector and household sector. Scare resources are exchanged in resource market, and final goods and services or outputs are exchanged in product markets.
Economic system is comprised of many elements that direct resources and behaviors in a society. It is the laws, traditions, institutions and mechanisms that are combined to allocate resources and distribute outputs
Invisible hands: that would guide resources to their best use and generate the best living standards possible given scarcity.
Capitalism is an economic system in which resources are privately owned and decisions about how to use those resources are made by individual and firms. In a capitalist, there is private property and decentralized decision making. Those who own resources make decisions in pursuit their own self-interest because as resource owners, they get to keep the proceeds from the sale of their resource or from the sale of the output produced by the resources.
Incentives: people are motivated through self-interest to make efficient choices as producers and consumers
The command or socialist economy, government owns or controls most resources and uses central planning to decide how to allocate resources. Rather than relying on incentives, central planners direct resources to certain lines of production and decide who gets the output.
Chapter 2. Production possibilities model
The model is a simple way of portraying what output can be produced using an economy’s current resources and technology.
The PPF represents the limits to what a society can produce at a given point in time. A PPF or curve, is a graph illustrating the combinations of two types of output that can be produced by society using the available resources and technology. Drawing a PPF for 2 outputs in a given time period assumes that: 1. The types and amounts of