Chapter 1: Life is Economics

What is Economics? Why should we study Economics?

Section A: Unlimited Wants and Limited Resources Scarcity Does scarcity affect all of the following?: Consumers Businesses Government scarcity= inability to provide enough products for peoples needs and wants.

Section B: Opportunity Costs Trade-Offs and Opportunity Costs Ted and his Girlfriend pg. 11 What are Ted’s trade-offs and costs? His girlfriends? Is there an opportunity cost to not doing homework? Trade-off: giving up one thing to have something else OC: Value of a second choice that you give up when you select a first choice.

Section C: From Resources to Products. Production Resources Factors of Production Natural Resources Labor Capital Entrepreneurship Production: The creation of any good or service Resources: necessary for production. NR: things in their natural state L: human effort applied to NR to produce goods and services C: the tools used by labor, can be raw material if made into other forms (lumber), Money only if used to by factories and other tools. E: organization that brings about production, owner who organizes other factors, takes risk.

Section D: How Economists Use Models Based on assumptions Used to understand past, present and future. Often change Used by government and business Model - theory or idea of what something is like or how it works. Based on Assumptions

Section E: Making Rational Choices Rational Choice- Taking greater value over those with lesser values. Different opinions make it hard Def: Taking the things with greater value and giving up those with lesser values.

Positive Statements Normative Statements Facts that can be proven Opinion Cannot be proven People can disagree

Section F: Production Possibilities Frontier Different combinations of two products that can be produced from a given quantity of the four factors of production.

Crusoe’s Possibilities

Can Crusoe produce outside the PPF? What does it mean if he is producing inside the PPF? How could he move the PPF outward?

Point A: Working at LESS THAN maximum efficiency. Opportunity cost does NOT have to be paid because to achieve more grain you do not necessarily have to give up more wine. You just need to be more efficient.

Points ON the curve: Maximum Efficiency Because you are maximally efficient along the curve, it is NOT possible to move to another point along the curve without an opportunity cost being paid.

Point B: Moving beyond the curve. Only possible if the curve is EXPANDED. How do you move out the curve? Improve the Quality and Quantity of your factors of production (FOP) Examples: Better tools, technology, education, population growth, etc.