Chapter 1
 1.1
o Scarcity: A situation in which unlimited wants exceed the limited
resources available to fulfill those wants.
o Economics is the study of the choices people make to attain
their goals, given their scarce resources.
o Use economic models to study choices
o Market: A group of buyers and sellers of a good or service and
the institution or arrangement by which they come together to
trade.
 Assume: People are rational, People respond to economic
incentives, Optimal decisions are made at the margin
o Rational, using all available information to achieve their goals,
consumers and firms weigh the benefits and costs of each action
and try to make the best decision possible.
o Comparing MC and MB is known as marginal analysis.
 marginal cost and benefit (MC and MB): the additional
cost or benefit associated with a small amount extra of
some action.
 Example: People with health insurance have less incentive
to stay healthy than people without health insurance.
 1.2
o The highest-valued alternative given up in order to engage in
some activity is known as the opportunity cost.
 Not always money
o Trade-off: The idea that, because of scarcity, producing more of
one good or service means producing less of another good or
service.
o Higher income = more goods and services
o Centrally planned economy: An economy in which the
government decides how economic resources will be allocated.
o Market economy: An economy in which the decisions of
households and firms interacting in markets allocate economic
resources.
o Mixed economy: An economy in which most economic decisions
result from the interaction of buyers and sellers in markets but
in which the government plays a significant role in the allocation
of resources., feature both
o Market: a group of buyers and sellers of a good or service and
the institution or arrangement by which they come together
o Productive efficiency, where goods or services are produced at
the lowest possible cost
o Allocative efficiency, where production is in accordance with
consumer preferences; in particular, every good or service is
produced up to the point where the last unit provides a marginal
benefit to society equal to the marginal cost of producing it.
o Voluntary exchange: A situation that occurs in markets when
both the buyer and the seller of a product are made better off
by the transaction, both buyer and seller better off
o Markets may not result in fully efficient outcomes. For example:
 People might not immediately do things in the most
efficient way
 Governments might interfere with market outcomes
 Market outcomes might ignore the desires of people who
are not involved in transactions – ex: pollution
o Economically efficient outcomes may not be the most desirable.
Markets result in high inequality; some people prefer more
equity, i.e. fairer distribution of economic benefits
o Equity: The fair distribution of economic benefits.
o An important trade-off for a government is that between
efficiency and equity.
 1.3
o Economic variables: something measurable that can have
different values, such as the incomes of doctors.
o Testability: good models generate testable predictions, which
can be verified or disproven using data.
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o Assumptions and simplifications: every model needs them in
order to be useful.
o Positive analysis: analysis concerned with what is
o Normative analysis: analysis concerned with what ought to be
economists mostly perform positive analysis
 1.4
o Microeconomics is the study of
 how households and firms make choices,
 how they interact in markets, and
 how the government attempts to influence their choices
o Macroeconomics is the study of the economy as a whole,
including topics such as inflation, unemployment, and economic
growth
 1.5
o Technology: the processes a firm uses to produce goods and
services
o Capital: manufactured goods that are used to produce other
goods and services
o Demand curve: as price decreases, demand increases
o Correlation vs causation
o Percent change: new – old over old *100
Chapter 2
 2.1
o Scarcity requires trade-offs. Economics teaches us tools to help
make good trade-offs.
o Production Possibilities Frontier (PPF) is a curve showing the
maximum attainable combinations of two goods that can be
produced with available resources and current technology
 Positive (what can be produced)
 Points below line are inefficient
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 Points above are not attainable with current resources
 Opportunity cost: The highest-valued alternative that
must be given up to engage in an activity.
 Must give up [x] in order to produce [x] more
 Not always linear
o Not all resources are suited for production of
all products
 The more resources already devoted to an activity,
the smaller the payoff to devoting additional
resources to that activity.
 Economic growth: the ability of the economy to increase
the production of goods and services
 Extends ppf outward
 Change of shape is a technological change in industry
 2.2
o Trade: The act of buying and selling.
 benefit from trade, by specializing in what you are
relatively good at
 go above ppf line
o Absolute advantage: The ability of an individual, a firm, or a
country to produce more of a good or service than competitors,
using the same amount of resources.
o Comparative advantage: The ability of an individual, a firm, or a
country to produce a good or service at a lower opportunity cost
than competitors
 BASIS OF TRADE
 2.3
o A market is a group of buyers and sellers of a good or service,
and the institution or arrangement by which they come together
to trade.
o Households consist of individuals who provide the factors of
production: labor, capital, natural resources, and other inputs
used to make goods and services.
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 Households receive payments for these factors by selling
them to firms in factor markets.
o Firms supply goods and services to product markets; households
buy these products from the firms.
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Chapter 3
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Labor: types of work
capitol: used to produce goods (machine, computer etc.)
natural resources: land, water, oil, ore, raw material
entrepreneurial: the ability to bring together factors of
production
A free market is one with few government restrictions on how a
good or service can be produced or sold, or on how a factor of
production can be employed.
Specialization is limited by the extent of the market
markets will do better than centrally-planned systems for
satisfying human desires because individuals are acting only in
their own rational self-interest.
“invisible hand” allows individual responses to collectively end
up satisfying the wants of consumers.
An entrepreneur is someone who operates a business, bringing
together the factors of production—labor, capital, and natural
resources—to produce goods and services
The best entrepreneurs create products that consumers never
even knew they wanted.
Property rights: the rights individuals or firms have to the
exclusive use of their property, including the right to buy or sell
it.