Introduction

• Economics → the study of how individuals and societies allocate their limited resources to satisfy their practically unlimited wants
• Resources → anything that can be used to produce something else
  • Lands  → natural resources
  • Labor  → effort of workers
  • Capital → any manufactured tool/good used to make another good
    • Human Capital  → skills + education of workers
  • Entrepreneurship → risk, innovation, organization of resources
• Types of Goods
  • Consumer Goods → goods produced for current consumption
    • Example → food
  • Capital Goods → goods that help produce other valuable goods
    • Example  **→ factories, investment
      • Using resources to create or buy new capital goods
• Fields of Economics
  • Microeconomics → the study of individual units that make up the economy
    • Focuses on individuals, businesses, industries
    • Example → how does a rise in sales taxes impact the retail industry?
  • Macroeconomics → the study of the overall aspects and workings of an economy
    • Focuses on the big picture
    • Example → is the economy of Japan in a recession?
• Positive v. Normative
  • Positive economics **→ can be tested and validated
    • Describes “what is”
    • Example → income in the US has been increasing
  • Normative economics → an opinion that cannot be tested or validated
    • Describes “what ought to be”
    • Example → the US is sending too much money to fund war efforts.
• Incentive → factors that motivate you to act or exert effort
  • Incentives are used to affect how people respond
    • Example → people get paid to do a job
  • Can lead to many unintended consequences
    • an unplanned result (usually negative) of an incentive
  • Positive incentives → encourage action by offering rewards / payments
    • Example → extra credit for participation
  • Negative incentives → discourage action by providing undesirable consequences or punishments
    • Harder to recognize
    • Example **→ being fined for plagiarism
• Trade-offs → with scarce resources, people have to choose some things over others
  • Doing one thing often means you will not have the time, energy, or resources to do something else
  • Every decision incurs a cost
• Short run v. Long run
  • Short run → the period in which we make decisions that reflect our immediate or short term wants, needs, or limitations
    • Consumers can only partially adjust behavior
  • Long run → the period in which we make decisions that reflect our needs, wants, or limitations over a long period of time
    • Consumers have time to fully adjust to market conditions
• Opportunity Cost **→ the highest valued alternative that must be sacrificed to get something else
  • The value of what must be given up to make a particular choice
  • The best possible decision is the one that minimizes the opportunity cost
  • Includes the explicit (monetary) cost of something at well as implicit (non-monetary) costs
• Marginal thinking → evaluating whether the benefit of one more unit of something is greater than its cost
  • Marginal benefit → additional benefit derived from extra unit
    • Example **→ the taste of pizza
  • Marginal cost → additional cost incurred from extra unit
    • Example  **→ the sick feeling from eating too much
• Trade → the voluntary exchange of goods and services between two or more parties
  • Trade creates value
  • Markets facilitate trading
    • Markets bring buyers and sellers together to exchange goods and services
• Ceteris paribus → “all other things being equal”
  • An essential assumption in model building
  • Allows economists to study the effect of a single variable

The PPF

• Production Possibilities Frontier → illustrates the combination of outputs a society can produce if all of its resources are being used efficiently

  • Ceteris paribus:
    • Fixed technology
    • Society only makes two goods
  • Points show how much of each good will be produced when resources shift
    • Slopes downwards because production of one decreases production of another
      • Demonstrates opportunity cost

    [](<https://lh7-rt.googleusercontent.com/docsz/AD_4nXfEfzVqjI4rpGROQJzO5sQTz72hsoAEcYUVQIFJYfeMqWjurSdicp-SchywFICnqJC6MIEMjmbtRlzzXUGWd_RZmHBOQtbwdYyg-4c8HcozONk1dJcVgnY1zaq4207_L3hqt1qFoyzeh2u7Gd3s4PIK5Zg?key=JVwyDDOawlAPEgMDwsWtYA>)
    
    - Points A, B, and D **→ *efficient* production**
    - Point E **→ *inefficient* production**
    - Point F **→ *impossible* to produce
  

• A straight-line PPF implies a constant opportunity cost

  • Resources are perfectly adaptable for producing both goods
  • Constant because resources used are the exact same

    [](<https://lh7-rt.googleusercontent.com/docsz/AD_4nXcoybe0tHhUCIy4c6S682CQftPf2gAlpf6U8_udDr25ozMInLfomIdk6lfbu3AJ22WWIvCmxoilQzAOECg3o8WTLI2GGi2h2FN6j8UcWv0yAALqIG3VlO8283dxTQobJtwESICNip3aSzuEc5Os2GgakaA?key=JVwyDDOawlAPEgMDwsWtYA>)
  

• The law of increasing opportunity cost → the opportunity cost of producing a good rises as society needs more of it

  • The curve will get steeper as it goes to the right

• Economic growth → enables a society to produce more output

  • Is shown by an outward shift in the PPF
  • Technological growth → shown by a vertical/horizontal shift in the PPF

Supply

• Quantity supplied → the amount of a good producers are willing and able to sell at the current price