3 shifters of production possibilities curve
change in quality/quantity of resources
trade
technology
theoretic vs. policy economics
theoretic
- scientific method used to make generalizations and abstractions to develop theories
policy economics
- applied theories to fix problems or meet economic goals
marginal analysis
thinking on the margin," making decisions based on additional benefits vs. additional costs
trade-offs
all the alternatives that we give up whenever we choose one course of action over others
opportunity cost
the most desirable alternative given up as a result of a decision
scarcity vs. shortages
scarcity occurs at all times for all goods; shortages temporary lack of supply
accountants vs. economists
accountants look only at explicit costs; economists look at explicit and implicit costs (opportunity costs)
five key economic assumptions
-unlimited wants but limited resources
-scarcity=choices, choices=costs (tradeoffs)
-everyone acts in their own self-interest
-all decisions made using marginal analysis (cost-benefit)
-real situations can be explained through simplified models and graphs
four factors of production
land, labor, capital, entrepreneurship (C.E.L.L)
4 key assumptions of PPC
-only two goods produced
-full employment of resources
-fixed resources
-fixed technology
constant opportunity cost
resources are easily adaptable for producing either good (straight line)
law of increasing opportunity cost
as you produce more of any good, the law of opportunity cost (foregone production of another good) will increase
per unit opportunity cost
how much each marginal unit costs (opportunity cost/units gained)
productive efficiency
products are being produced in the last costly way
allocated efficiency
supply and demand, optimal point on the curve depends on the desires of society
absolute advantage
the producer that an produce the most output OR input
comparative advantage
the producer with the lowest opportunity cost
positive economics
focuses on facts and cause-and-effect relationships, avoids value judgements, "what is" not "what ought to be
normative economics
economic policy incorporating value judgements "what ought to be
human capital
any skills or knowledge gained by a worker through education or experience
physical capital
any human-made resource that can be used to create other goods or services
the three economic questions
what goods and services should be produced?
how should they be produced?
who consumes these goods and services?
circular flow model
The Product Market-
The "place" where goods and services produced by businesses are sold to households.
The Resource (Factor) Market-
The "place" where resources (land, labor, capital, and ent.) are sold to businesses.