Economics Chapter 1: Limits, Alternatives, and Choices

Microeconomics and Macroeconomics

• Microeconomics studies the individual consumer, firm, or market
• Macroeconomics studies the entire economy or a major aggregate of the economy

Positive and Normative Economics

• Positive economics deals with factual economic statements
• Normative economics involves value judgments in economic statements

The Economizing Problem

• The economizing problem arises from limited income and unlimited wants
• The budget line shows attainable and unattainable combinations of goods and services
• Trade-offs and opportunity costs are involved in making choices

Consumer's Budget Line

• The budget line represents the different combinations of two goods that can be purchased with a given income
• The budget line is determined by the income and prices of the two goods

Society's Economizing Problem

• Society's economizing problem involves the allocation of four categories of economic resources: land, labor, capital, and entrepreneurial ability
• Entrepreneurs employ the other factors of production, take initiative, make strategic business decisions, innovate, and take risks

Production Possibilities Model

• The production possibilities model shows different combinations of two goods that an economy can produce with full employment, fixed resources, and fixed technology
• The model is used to illustrate the trade-offs between consumer goods and capital goods

Production Possibilities Graph

• The production possibilities graph shows the different combinations of two goods that an economy can produce
• The graph is concave due to the law of increasing opportunity costs

Law of Increasing Opportunity Costs

• The law of increasing opportunity costs states that as more of a particular good is produced, its marginal opportunity costs increase
• The production possibilities curve has a concave shape due to this law

Optimal Output

• The optimal output is achieved when the marginal benefit equals the marginal cost

Growing Economy

• A growing economy can produce more of both goods due to economic growth
• The production possibilities curve shifts outward due to economic growth

Economics

• Economics is a social science concerned with making optimal choices due to scarcity
• Scarcity and choice lead to opportunity costs and the need for purposeful behavior to increase utility
• Marginal analysis is used to make decisions based on the marginal benefits and costs of a choice

This quiz covers the basics of economics, including scarcity, opportunity cost, and the economic perspective. Learn how humans make optimal choices with limited resources.