Chapter 1

• Economics is the study of how individuals, business and institutions make social choices to optimize their level of satisfaction under conditions of scarcity
• The opportunity cost of an activity is the value of the next best alternative that must be forgone in order to undertake this activity
• Scarcity is Limited goods and services– Limited time
• Consumers-Greatest possible U with unlimited wants/needs and certain budget constraints
• Producers-Maximum profit with cost constraintsand certain production techniques
• Utility (U) is the pleasure, happiness or satisfaction obtained from consuming a good or a service.
• Concepts of utility– Cardinal (measurable) vs. ordinal (comparative)– Choose between options to max U– Allocation of time, energy and money
• Marginal = “extra”, “additional” or “achange in”.
• Decision to obtain the marginal benefitassociated with some specific optionalways includes the marginal cost offorgoing something else
• Macro economics examines either theeconomy as a whole orits basic subdivisions oraggregates(government, householdsand business sectors)
• Microeconomics is concerned withindividual units such asa person, a household,a firm or an industry
• Positive economics focuses on facts andcause-and-effectrelationships.• Description, theorydevelopment and theorytesting
• Normative economics incorporates valuejudgments about what theeconomy should be like• Expressions of support forparticular policies
• tools for s for ascertaining cause and effect– Generalizations
• Tendencies of typical or average consumers,workers or business firms– Other-things-equal assumption (ceterisparibus)
• Strong assumption for a particular analysis(price-quantity demanded example)– Graphical expression
• Rational (purposeful) behaviour– ‘rational self-interest’ an assumptionof economics– Decisions not free from mistakes orunaffected by emotions or feelings– Desire to maximize level ofsatisfaction (utility)
• Economics


  The study of how individuals, businesses, and institutions make social choices to optimize their levels of satisfaction under conditions of scarcity
• Economic perspective 


  A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.
• Economic resources 


  The land, labour, capital and entrepreneurial ability that are used in the production of goods and services; productive agents; factors of production.
• Opportunity cost


  The amount of other products that must be forgone or sacrificed to produce a unit of a product. The value of the next best alternative that is forfeited to undertake the activity.
• Utility


  The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
• Rational behaviour 


  Individuals look for and pursue opportunities to increase their levels of satisfaction when consuming an article.
• How are consumers rational?

  in deciding which goods and services to buy
• How are businesses rational?

  In what products to produce and how to create them
• How are government entities rational?

  What public services to provide and how to finance them
• Rational behaviour 


  People make decisions with some desired outcome in mind
• The three elements of optimal behaviour 


  Calculation, negotiation, expenditure
• A rational consumer 


  Maximises utility subject to budget constraints
• rational producers


  maximise the profits of the firm, and reach the max outputs.
• Marginal analysis 


  The comparison of marginal (‘extra’ or ‘additional’) benefits and marginal costs, usually for decision making.
• Scientific method 


  The procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles and laws.
• Theories, principals and models are

  Rational simplifications
• Economic principle


  A widely accepted generalization about the economic behaviour of individuals or institutions.
• Other things equal assumptions (ceteris paribus)


  The assumption that factors other than those being considered are held constant; ceteris paribus assumption.
• Macroeconomics 


  The part of economics concerned with the economy as a whole; with such major aggregates as the household, business and government sectors; and with measures of the total economy.
• Aggregate 


  A collection of specific economic units treated as if they were one. For example, all prices of individual goods and services are combined into a price level, or all units of output are aggregated into gross domestic product.
• Microeconomics 


  The part of economics concerned with decision making by individual units such as a household, a firm or an industry and with individual markets, specific goods and services, and product and resource prices.
• Positive economics 


  The analysis of facts or data to establish scientific generalizations about economic behaviour. Focus on facts and cause and effect relationships
• Normative economics


  The part of economics involving value judgements about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.