TEST 1
Unit 1 - Basic Economic Concepts
Economics
● Economic perspective = way of thinking
● Rational behavior
● Utility - satisfaction
● Citizenship and personal application
Terms
● Positive Economics - “What is” [ Fact ]
● Normative Economics - “What ought to be” [ Incorp. Opinions ]
● Macroeconomics - Economy as a whole
● Microeconomics - Specific Economic Units
● Ceteris Paribus - Other things equal assumption [Constant]
● Marginal - Extra [ eg. one added, one additional unit, etc.]
■ [ eg. decisions at the margin ]
● Social science concerned with the efficient use of scarce resources to achieve
maximum satisfaction of economic wants
○ Is the benefit of that fourth slice worth it?
■ Would need an incentive to make it work [eg. Four for the price
of three ]
The Economic Problem
, ● "There's no such thing as a free lunch" (tinstaafl)
○ There's a cost of opportunity still involved. The time that you spent
eating lunch can't be spent somewhere else, etc. Goes back to the
Broken Glass
● Scarcity - Limited resources are never sufficient to satisfy unlimited wants
■ What to produce
■ How to produce
■ For whom to produce
● These problems are solved by the market in capitalism,
central planners in communist / command economies
● Opportunity Cost - Value of the next best alternative
○ By foregoing an opportunity for another, that opportunity is the cost.
Economic Resources - Factors of Production
● Land ( Income payment / Return on investment - Rent )
● Labor ( IP/RoI - Wages )
● Capital ( IP/RoI - Interest )
○ Human Capital - Skillset/Knowledge of labor force
● Entrepreneurs ( IP/RoI - Profit ) - Risk bearers.
Money is a medium of exchange, NOT a factor of production
● Frederic Bastiat "The Broken Window" - Damage is good for the repairer, not
the economy as a whole
Economic Goals
● Growth
● Full employment
○ Businesses operating @ capacity, full 40hrs etc
● Efficiencies
○ Allocative - Using goods and services to best benefit society. The right
amount
■ Marginal benefit = Marginal costs
○ Productive - Lowest possible cost
● Price-Level Stability
○ Inflation
● Freedom
● Equitable Distribution of Income
, ○ Within a range. Not striving for socialism
● Security
● Balance of Trade
Faulty Economic Reasoning
● Things that trip people up when learning economic models
○ Political Bias
○ Definitions
■ ( e.g - capital, investment )
○ Association ≠ Causation
○ Fallacy of Composition - a logical error where one assumes that what
is true for a part or individual member of a whole must also be true for
the entire group or system. In other words, it's the mistake of assuming
that what applies to the parts necessarily applies to the whole.
■ Example: "Each player on this football team is an excellent
individual athlete, so this must be an unbeatable team." This
reasoning is flawed because a great team requires more than
just individually talented players; it also needs teamwork,
strategy, and other factors.
○ Faulty ceteris paribus - a Latin phrase meaning "all other things being
equal" or "other things held constant." It's commonly used in economics
and social sciences to isolate the effect of one variable by assuming all
other relevant factors remain unchanged.
■ A faulty ceteris paribus occurs when this assumption is
incorrectly applied or when significant factors that should be
considered are overlooked or ignored in an analysis or argument.
■ Example: Concluding that lowering taxes will always increase
government revenue, without considering other economic
factors like overall economic growth, changes in spending
habits, or potential budget cuts. This oversimplifies a
complex economic relationship by assuming all other factors
remain constant when they likely would not.
Production Possibilities
Unit 1 - Basic Economic Concepts
Economics
● Economic perspective = way of thinking
● Rational behavior
● Utility - satisfaction
● Citizenship and personal application
Terms
● Positive Economics - “What is” [ Fact ]
● Normative Economics - “What ought to be” [ Incorp. Opinions ]
● Macroeconomics - Economy as a whole
● Microeconomics - Specific Economic Units
● Ceteris Paribus - Other things equal assumption [Constant]
● Marginal - Extra [ eg. one added, one additional unit, etc.]
■ [ eg. decisions at the margin ]
● Social science concerned with the efficient use of scarce resources to achieve
maximum satisfaction of economic wants
○ Is the benefit of that fourth slice worth it?
■ Would need an incentive to make it work [eg. Four for the price
of three ]
The Economic Problem
, ● "There's no such thing as a free lunch" (tinstaafl)
○ There's a cost of opportunity still involved. The time that you spent
eating lunch can't be spent somewhere else, etc. Goes back to the
Broken Glass
● Scarcity - Limited resources are never sufficient to satisfy unlimited wants
■ What to produce
■ How to produce
■ For whom to produce
● These problems are solved by the market in capitalism,
central planners in communist / command economies
● Opportunity Cost - Value of the next best alternative
○ By foregoing an opportunity for another, that opportunity is the cost.
Economic Resources - Factors of Production
● Land ( Income payment / Return on investment - Rent )
● Labor ( IP/RoI - Wages )
● Capital ( IP/RoI - Interest )
○ Human Capital - Skillset/Knowledge of labor force
● Entrepreneurs ( IP/RoI - Profit ) - Risk bearers.
Money is a medium of exchange, NOT a factor of production
● Frederic Bastiat "The Broken Window" - Damage is good for the repairer, not
the economy as a whole
Economic Goals
● Growth
● Full employment
○ Businesses operating @ capacity, full 40hrs etc
● Efficiencies
○ Allocative - Using goods and services to best benefit society. The right
amount
■ Marginal benefit = Marginal costs
○ Productive - Lowest possible cost
● Price-Level Stability
○ Inflation
● Freedom
● Equitable Distribution of Income
, ○ Within a range. Not striving for socialism
● Security
● Balance of Trade
Faulty Economic Reasoning
● Things that trip people up when learning economic models
○ Political Bias
○ Definitions
■ ( e.g - capital, investment )
○ Association ≠ Causation
○ Fallacy of Composition - a logical error where one assumes that what
is true for a part or individual member of a whole must also be true for
the entire group or system. In other words, it's the mistake of assuming
that what applies to the parts necessarily applies to the whole.
■ Example: "Each player on this football team is an excellent
individual athlete, so this must be an unbeatable team." This
reasoning is flawed because a great team requires more than
just individually talented players; it also needs teamwork,
strategy, and other factors.
○ Faulty ceteris paribus - a Latin phrase meaning "all other things being
equal" or "other things held constant." It's commonly used in economics
and social sciences to isolate the effect of one variable by assuming all
other relevant factors remain unchanged.
■ A faulty ceteris paribus occurs when this assumption is
incorrectly applied or when significant factors that should be
considered are overlooked or ignored in an analysis or argument.
■ Example: Concluding that lowering taxes will always increase
government revenue, without considering other economic
factors like overall economic growth, changes in spending
habits, or potential budget cuts. This oversimplifies a
complex economic relationship by assuming all other factors
remain constant when they likely would not.
Production Possibilities
