Econ Chapter 1 Flashcards

Economic Concepts and Definitions

• Utility: Represents pleasure or satisfaction derived from a product.
• Economic Self-Interest: A core principle that implies individuals act to maximize their utility.
• Opportunity Cost: Refers to the loss of potential gain from alternatives when one choice is made; crucial to understanding investment decisions.
• Marginal Analysis: The evaluation of the additional benefits and costs associated with a decision. Individuals should increase consumption until marginal benefit equals marginal cost.

Decision-Making Principles

• Rational Behavior: People seek opportunities to enhance their utility, leading to purposeful decision-making.
• Budget Line: Illustrates combinations of goods a consumer can afford, given their income and prices of goods.
• Ceteris Paribus: A Latin term meaning "other things equal," used to isolate relationships between variables in economic models.

Macroeconomics vs. Microeconomics

• Macroeconomics: Focuses on the economy as a whole, addressing aggregate factors like inflation and unemployment.
• Microeconomics: Concerned with individual units and specific markets, analyzing decisions at a smaller scale.

Types of Economic Statements

• Positive Statement: Objective statements that can be tested and validated, focused on facts (e.g., "The price of smartphones declined 2.8 percent last year").
• Normative Statement: Subjective statements based on value judgments (e.g., “Taxes should be increased on beer”).

Scarcity and Resources

• Scarcity: A fundamental economic issue due to limited resources relative to unlimited wants.
• Factors of Production: Include land, labor, capital, and entrepreneurial ability, which are crucial for production.

Production Possibilities Curve (PPC)

• PPC: Demonstrates the maximum output of two goods, indicating trade-offs and opportunity costs.
• Bowed-Out Shape: Reflects that resources are not perfectly substitutable, meaning production shifts incur increasing opportunity costs.
• Points Inside the PPC: Indicate inefficiency and the potential to increase output without additional resources.

Economic Growth and Efficiency

• Outward Shift of PPC: Represents economic growth, achievable through better resource utilization or technological advances.
• Full Employment: Operating on the PPC means that the economy is utilizing its resources efficiently.

Implications of Economic Decisions

• Marginal Benefit vs. Marginal Cost: Decisions should be based on where the marginal benefit of an action outweighs its marginal cost.
• Resource Allocation: Choices modify existing resource distribution, emphasizing the importance of opportunity costs in every decision.

Application Examples

• Investment Decisions: Example of opportunity cost illustrated by Joe's choice of gold coins over a bank deposit showing missed returns.
• Consumer Behavior: The purchase of additional products echoes satisfaction reaching a point of diminishing returns.

Key Takeaways

• Understanding economic principles such as utility, opportunity cost, and marginal analysis is essential for making informed personal and business decisions.
• Distinguishing between macroeconomics and microeconomics allows for clearer analysis of economic conditions and policies.
• The production possibilities curve serves as a powerful tool to illustrate trade-offs and the concept of scarcity within an economy.