Chapter 1: The Fundamental Problem – Scarcity and Choice

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Economics
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A study of the way in which we use scarce resources to satisfy seemingly unlimited wants
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Economic Perspective
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A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions
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Scarcity
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The limits placed on the amount of goods and services available for consumption
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Opportunity Cost
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The (amount) of other products that must be sacrificed due to the production or consumption of another product
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Utility
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Pleasure, happiness, or satisfaction obtained from consumption
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Marginal Analysis
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The comparison of marginal (extra or additional) benefits and marginal costs, usually for decision making
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Economic Principle
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Generalizations relating to economic behavior of individuals or institutions or the economy itself (average tendencies)
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Ceteris Paribus
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(Other-things-equal assumption) The assumptions that factors other than those being considered are held constant
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Microeconomics
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The part of economics concerned with decision making by individual units such as a household, firm, or industry as well as individual markets, specific goods and services, and product and resource prices
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Macroeconomics
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The part of economics concerned with the performance and behavior of the economy as a whole. Focuses on economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as the household, business, and government sectors
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Aggregate
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A collection of specific economic units treated as if they were one unit (ex. the prices of all individual goods and services are combined into the price level)
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Positive Economics
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Facts, cause-and-effect relationships – what is; the analysis of facts or data to establish scientific generalizations about economic behavior
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Normative Economics
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Incorporates value judgements about what the economy should be or ought to be by looking at desirable aspects of other economies
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Economizing Problem
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Individuals’ unlimited wants exceed their scarce incomes, which forces them to choose between different combinations of assumptions
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Budget Line
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A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products’ prices
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Economic Resources
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The land, labor, capital, and entrepreneurial ability that are used to produce goods and services; the factors of production
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Land
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In addition to the part of the earth’s surface not covered by water, this term refers to any and all natural resources (“free gifts of nature”) that are used to produce goods and services
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Labor
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Any mental or physical exertion on the part of a human being that is used in the production of a good or service. One of the four economic resources
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Capital
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Human-made resources (buildings, machinery, and equipment) used to produce goods and services. One of the four economics resources
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Investment
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In economics, spending that pays for the production and accumulation of capital goods
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Entrepreneurial Ability
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The human resource that combines the other economic resources to produce new products or make innovations in the production of existing products
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Entrepreneurs
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Individuals who provide entrepreneurial ability to firms by setting strategy, advancing innovations, and bearing the financial risk if their firms do poorly
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Factors of Production
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The four economic resources: land, labor, capital, and entrepreneurial ability
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Consumer Goods
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Products and services that satisfy human wants directly
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Production Possibilities Curve
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A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed
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Law of Increasing Opportunity Costs
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The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises
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Economic Growth
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An outward shift in the production possibilities curve that result from an increase in resource supplies or quality or an improvement in technology; an increase of real output or real output per capita

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