Scarce economic resources can mean limited goods and services, as scarcity restricts options and demands choices. TANSTAAFL – There ain’t no such thing as a free lunch. Opportunity costs – to obtain more of one thing, the opportunity to get the next best thing is foregone.
Economics involves the assumption that human behavior reflects rational self-interest, with individuals seeking the opportunities to increase their utility – pleasure/satisfaction obtained from consuming a good or service. As costs and benefits are weighed, economic decisions are considered ‘purposeful’.
The economic perspective focuses on marginal analysis – comparisons of marginal benefits and costs for decision making. Marginal, in the case of economics, means extra, additional, or change in.
A very well tested and widely accepted theory is referred to as an economic law or an economic principle. Economic principles are generalizations relating to economic behavior or to the economy itself. They are constructed on the assumption of all other things being equal. Many economic models are expressed graphically.
Microeconomics is the part of economics concern with individual units such as a person, household, a firm, or industry. At the micro level details are observed under figurative microscope in small segments of the economy. In microeconomics, we examine the sand, rock, and shells, at the beach.
Macroeconomics examines either the economy as a whole or its basic subdivisions or aggregates such as the government, household, and business sectors. Aggregates are collections of specific economic units treated as though they were one unit. This enables macroeconomics to obtain an overview or general outline of the structure of the economy and the relationship of its major aggregates. Figuratively, macroeconomics looks at the beach not pieces stand, the rocks, and shells.
The micro macro distinction does not mean that economics is highly compartmentalized so that every topic can be readily label as other micro or macro: many topics and subdivisions of economics are rooted in both.
Positive economics focuses on facts and cause-and-effect relationships. It includes description, theory development, and theory testing. It avoids value judgments, tries to establish scientific statements but economic behavior, and deals with what the economy is actually like. The scientific-based analysis is critical to good policy and analysis.
Economic policy involves normative economics, incorporating value judgments but with the economy should be like all particular policy action should be recommended to achieve a desirable goal.
In choosing among alternatives, people and incur opportunity costs-the value of their next best option. The economic perspective stresses resource scarcity and necessity of making choices, the assumption of a purposeful or rational behavior, and comparisons of marginal benefit and marginal cost.
Economizing problem is the need to make choices because economic wants exceed economic meets. We’ll have a finite amount of income even the wealthiest among us. However, people have virtually unlimited wants, desiring various goods and services that provide utility and our wants extend over a wide range of products, from necessities to luxuries. Economic wants tended change multiply as new and improved products are introduced. Services, as well as goods, satisfy our wants. For many, the desire for goods and services cannot be fully satisfied. Our limited income but unlimited wants means it is our self-interest economize, picking and choosing the goods and services that maximize our satisfaction.
A budget line or budget strained is a scheduler curve that shows various combinations of two products a consumer can purchase with specific money income. All conditions inside the budget line are attainable. All combinations beyond the budget line are unattainable. This can help illustrate the idea of trade-offs arising from limited income. To obtain more of something, you may have to give up something else. Limited income forces people to choose what to buy and what to forgo in order to fulfill their wants, selecting the combination of items that person feels is best location of the budget constraint varies with income. Increasing income shifts the budget line to the right, decreasing money income shifts at the left. Straight-line budget constraints and my constant opportunity costs associate with obtaining more by the good.
Society also faces an economizing problem, and must make choices under conditions of scarcity.
Society has limited or scarce economic resources, meaning all natural, human, and manufactured resources that go into the production of goods and services. Resource categories include land, labor, capital, and entrepreneurial ability. Land includes all natural resources that are used in the production process, such as minerals, water, arable land, oil deposits, and forests. Labor is comprised of physical and mental talents of the individuals that are used to produce goods and services. Capital includes all manufactured AIDS that are used in producing consumer goods and services, such as factories, storage, transportation, and distribution facilities along with tools and machinery. The purchase of capital goods is investment. Capital goods are different from consumer goods as consumer goods satisfy wants directly, but capital goods do so indirectly by eating the production of consumer goods. Capital does not refer to money, but to the tools, machinery, and other productive equipment. Money itself produces nothing; it is useful only to purchase capital goods.
Entrepreneurial ability performs several functions:
• Entrepreneurs take the initiative in combining the resources of land labor and capital to produce a good or service. The entrepreneur is the driving force behind production and agent who combines other resources and what is hoped to be a successful business venture.
• The entrepreneur makes the strategic business decisions that set the course of the business.
• Entrepreneurs are innovators, commercializing new products, new production techniques, or even new forms of business organizations.
• Entrepreneurs bear risk, having no guarantee of profit.
Land, labor, capital, and entrepreneurial ability are combined to produce goods and services and are called the factors of production, or simply “inputs”.
Dab representative production possibilities table is shown graphically as a production possibilities curve. Each point on the production possibilities curve represents some maximum output of the two products. The curve is the constraint, showing the limits of attainable outputs. Points on the curve are attainable as long as the economy is using all of its available resources. Points inside the curve are attainable, and reflect less total output, and are therefore not as desirable as the points on the curve.
The law of increasing opportunity costs states as the production of particular good increases, the opportunity cost of producing an additional unit rises. The economic rationale for the law of increasing opportunity costs is economic resources are not completely adaptable to alternative uses. Some resources are better producing one type of good than to producing others.
The optimal amount of activity occurs when marginal benefit equal to marginal cost. As long as marginal benefit exceeds marginal cost, economic activity should be expanded. If marginal cost exceeds marginal benefit, and economic activity should be reduced.
In economy’s current choice of positions on this production possibilities curve helps determine the future location of that curve. That’s for the future are things such as capital goods, research and education, and preventative medicine. Goods for the future increase the quantity and quality of property resources, enlarge the stock of technological information, and improve the quality of human resources. Goods for the present are consumer goods such as food, clothing, and entertainment.
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies (18th ed.). Boston, MA: McGraw-Hill Irwin.
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