1.

1 Three Key Economic Ideas

Economics study of the choices consumers, business managers, and government officials make to
attain their goals (given their scare resources)
Scarcity wants are unlimited, but the resources available to fulfill those wants are limited
Marginal extra or additional
People are rational, people respond to incentives, optimal decisions are made at the margin
Importance of scarcity on economics

1.2 The Economic Problem that Every Society Must Solve
Trade-offs producing more of one good or service means producing less of another good or service
Opportunity Cost the highest-valued alternative that must be given up to engage in that activity
Centrally Planned Economy economic decisions are made by the government
Market Economy economic decisions are made by consumers and firms
Mixed Economy economic decisions are made by consumers and firms but in which the government
also plays a significant role (United States)
Productive Efficiency when a good or service is produced at the lowest possible cost
Allocative Efficiency when production is in accordance with consumer preferences
Voluntary exchange situation that occurs in markets when both the buyer and seller of a product are
made better off by the transaction
Equity a fair distribution of economic benefits
Scarcity implies that every society and every individual must face trade-offs
Three economics questions every society must answer
Productive vs. Allocative efficiency
Efficiency vs. Equity (trade-off between the two)

1.3 Economic Models
Economic Variable something measurable that can have different values (wages)
Economic Model simplified versions of reality used to analyze real-world economic situations
Positive Analysis concerned with what is
Normative Analysis concerned with what ought to be
Why economists use models? How economic data is used to test models?
Five Steps of a useful economic model:
Normative vs. Positive Analysis (economics mainly involves which?)

1.4 Microeconomics and Macroeconomics
Microeconomics study of how households and firms make choices, how they interact in markets, how
the government attempts to influence their choices
Macroeconomics study of the economy as a whole (inflation, unemployment, economic growth)
Differences
Example issues


*Social Science
Studies the actions of individuals
Applies the scientific method to the study of the interactions among individuals
Considers human behavior -