Chapter 1 - Econ

It takes two things for scarcity to exist: finite resources and infinite wants. If people's wants were equal to or less than the finite resources available to satisfy their wants, scarcity would not exist. Scarcity exists only because people's wants are greater than the resources available to satisfy their wants. Scarcity is the condition resulting from infinite wants clashing with finite resources.

Because of scarcity, there is a need for a rationing device. People will compete for the rationing device. For example, if dollar price is the rationing device, people will compete for dollars.

Because our unlimited wants are greater than our limited resources—that is, because scarcity exists—some wants must go unsatisfied. We must choose which wants we will satisfy and which we will not.

The most highly valued opportunity or alternative forfeited when a choice is made

Answer Every time a student is late to history class, the instructor subtracts one-tenth of a point from the person's final grade. Economists predict that, if the instructor raises the opportunity cost of being late to class by subtracting one point from the final grade, then fewer students will be late to class. In sum, the higher the opportunity cost is of being late to class, the less likely it is that people will be late to class.

The purpose of building a theory is to explain something that is not obvious. For example, the cause of changes in the unemployment rate is not obvious, so the economist would build a theory to explain changes in the unemployment rate.

A theory of the economy seeks to explain why certain things in the economy happen. For example, a theory of the economy might try to explain why prices rise or why output falls. A description of the economy is simply a statement of what exists in the economy. For example, we could say that the economy is growing or contracting or that more jobs are available this month than last month. A description doesn't answer questions; it simply tells us what is. A theory tries to answer a "why" question, such as, "Why are more jobs available this month than last month?"

If you do not test a theory, you will never know whether you have accomplished your objective in building the theory in the first place. In other words, you will not know whether you have explained something accurately. We do not simply accept a theory if it sounds right, because what sounds right may actually be wrong. For example, no doubt during the time of Columbus the theory that the earth was flat sounded right to many people and the theory that the earth was round sounded ridiculous. The right-sounding theory turned out to be wrong, though, and the ridiculous-sounding theory turned out to be right.

Scarcity is the condition in which our wants are greater than the limited resources available to satisfy them

1. Scarcity implies choice. In a world of limited resources, we must choose which wants will be satisfied and which will go unsatisfied. 2. implies a need for a rationing device. A rationing device is a means of deciding who gets what quantities of the available resources and goods. 3. Scarcity implies competition. If resources were ample to satisfy all our seemingly unlimited wants, people would not have to compete for the available, but limited, resources.

Every time a person makes a choice, he or she incurs an opportunity cost. Opportunity cost is the most highly valued opportunity or alternative forfeited when a choice is made. The higher the opportunity cost of doing something, the less likely it is that it will be done.

What distinguishes the economist from the noneconomist is that the economist thinks in terms of both costs and benefits. Asked what the benefits of taking a walk may be, an economist will also mention the related costs. Asked what the costs of studying are, an economist will also point out its benefits.

Marginal benefits and costs are not the same as total benefits and costs. When deciding whether to talk on the phone one more minute, an individual would not consider the total benefits and total costs of speaking on the phone. Instead, the person would compare only the marginal benefits (additional benefits) of talking on the phone one more minute with the marginal costs (additional costs) of talking on the phone one more minute.

An incentive is something that encourages or motivates a person to undertake an action. Incentives are closely related to benefits and costs. Individuals have an incentive to undertake actions for which the benefits are greater than the costs or, stated differently, for which they expect to receive some net benefits (benefits greater than costs).

As long as the marginal benefits of an activity are greater than its marginal costs, a person gains by continuing to do the activity—whether the activity is studying, running, eating, or watching television. The net benefits of an activity are maximized when the marginal benefits of the activity equal its marginal costs. Efficiency exists at this point.

Ceteris paribus is a Latin term that means "all other things constant" or "nothing else changes." Ceteris paribus is used to designate what we believe is the correct relationship between two variables