MICRO 1 basic concepts (2)

• Scarcity: Society has limited resources, cannot produce all the goods and services people wish to have... § Buy/hire factors of production, use them to produce goods and services § Se

Resource inputs used to produce goods and services.

• Land

• Labor

• Capital

• Entrepreneurship.

• Scarcity: Society has limited resources, cannot

produce all the goods and services people wish to have

8

How economy as a whole works

• Productivity is the ultimate source of living

Ten Principles of Economics

2 Marrying the one you love involves opportunity costs, primarily because:

a being married restricts your freedom to marry someone else, and you must

also consider making someone else happy when making decisions that affect both of you.

b two can live as cheaply as one.

c having children is unavoidable and reduces the time you could work for pay.

d income taxes on single people are heavier than on married couples.

1 The opportunity cost of making a specific choice is:

a useful primarily as an indicator of relative prices.

b Its nominal costs in terms of all other goods.

c the information that guides your decision.

d measured by the subjective value of the best alternative you sacrifice.

§ Buy/hire factors of production,

use them to produce goods and services

§ Sell goods & services

Circular-flow diagram

Markets for Factors of Production

Households Firms

G & S

sold

Revenue

Markets for Goods &

Services

Circular-flow diagram

Business firms Governments

Households

Product markets

Factor markets

Foreign market

participants

Foreign market

participants

5 Households play what role(s) in the circular flow diagram?

a purchasers of factors of production and sellers of services

b purchasers of factors of production and sellers of goods

c purchasers of goods and services and sellers of factors of production

d purchasers of goods and services only

6 In a circular-flow diagram,

a taxes flow from households to firms, and transfer payments flow from firms

to households.

b income payments flow from firms to households, and sales revenue flows

from households to firms.

c resources flow from firms to households, and goods and services flow from

households to firms.

d inputs and outputs flow in the same direction as the flow of dollars, from

firms to households.

• A graph: combinations of output that the economy can possibly produce

• Producing one computer requires 100 hours labor.

• Producing one ton of wheat requires 10 hours labor.

5,0000

4,000100

2,500250

1,000400

50,0000

40,00010,000

25,00025,000

10,00040,000

0500

050,000

EDCBA

WheatComputers

WheatComputers

Production

Employment of labor hours

Production possibilities frontier

0 1,000 2,000 3,000 4,000 5,000 6,000

0 100 200 300 400 500 600

Wheat (tons)

Computers

A B

C

D E

Production possibilities frontier

Moving along a PPF

Involves shifting

resources from the

production of one good

to the other

Society faces a tradeoff

Getting more of one

good requires sacrificing

some of the other

The slope of the PPF

The opportunity cost of

one good in terms of

the other

Point on graph

Production

puters Wheat

10 The relationship between microeconomics and macroeconomics is analogous

to the relationship between

a the behavior of a single baseball player and the collective behavior of the entire

team out on the baseball field

b the behavior of a single race car driver and the collective behavior of all cars racing

on a race track

c the behavior of one football player and the collective behavior of the entire football

team out on the field

d all of the above

11 “An increase in interest rates will lower economic growth.” This statement is

a a positive economic statement.

b a normative economic statement.

c untrue in every case.

d controversial, and so not a valid economic issue.

12 The distinction between positive and normative economics

a is that positive economics applies only to microeconomic problems.

b is that normative economics applies only to microeconomic problems.

c explains why economics is not a social science but a natural science.

d helps us to understand why economists sometimes disagree with one

another