DEFINITION L1-1:

ECONOMICS IS THE STUDY OF HOW PEOPLE CHOOSE TO USE THEIR SCARCE RESOURCES IN AN ATTEMPT TO SATISFY THEIR UNLIMITED WANTS.

DEFINITIONS L1-2

ECONOMIC RESOURCES: ARE THE INPUTS, OR FACTORS OF PRODUCTION, USED TO PRODUCE THE GOODS AND SERVICES THAT PEOPLE WANT.

They consist of:

LABOR: THE PHYSICAL AND MENTAL EFFORT USED TO PRODUCE GOODS AND SERVICES.

CAPITAL: THE BUILDINGS, EQUIPMENT, AND HUMAN SKILL USED TO PRODUCE GOODS AND SERVICES.

LAND: PLOTS OF GROUND AND OTHER NATURAL RESOURCES USED TO PRODUCE GOODS AND SERVICES.

ENTREPRENEURIAL ABILITY: MANAGERIAL AND ORGANIZATIONAL SKILLS NEEDED TO START A FIRM, COMBINED WITH THE WILLINGNESS TO TAKE RISKS.

FIGURE L2-1

DEFINITION L2-1:

OPPORTUNITY COST IS THE VALUE OF THE NEXT BEST ALTERNATIVE FORGONE WHEN AND ITEM OR ACTIVITY IS CHOSEN.

FIGURE L2-2

DEFINITION L2-2:

PRODUCTIVE EFFICIENCY IS THE CONDITION THAT EXISTS WHEN THERE IS NO WAY RESOURCES CAN BE REALLOCATED TO INCREASE THE PRODUCTION OF ONE GOOD WITHOUT DECREASING THE PRODUCTION OF ANOTHER.

FIGURE L2-3

FIGURE L2-3B

DEFINITION L2-3:

LAW OF INCREASING OPPORTUNITY COST:

In order to produce each additional increment of a particular good, a successively larger increment of an alternative good must be sacrificed if the economic resources are already being used efficiently.

FIGURE L2-4

DEFINITION L1-3:

RATIONAL BEHAVIOR implies that individuals attempt to minimize the expected cost of achieving a given benefit or maximize the expected benefit achieved with a given cost.

DEFINITIONS:

THEORIES are generalizations about causal relationships between facts, or variables.

A MODEL is any simplified representation of reality that is used to better understand real-life situations. In economics the situations are economic functions.

Economic theory consists largely of economic models.

COMPARATIVE ADVANTAGE versus ABSOLUTE ADVANTAGE:

An individual (or producer, or society) has an ABSOLUTE ADVANTAGE at producing something if s/he can produce it using fewer resources than other individuals use.

An individual (or producer, or society) has a COMPARATIVE ADVANTAGE at producing something if his/her opportunity cost of producing it is lower than that of other individuals.

COMPARATIVE ADVANTAGE is a more general concept than ABSOLUTE ADVANTAGE. One can have a comparative advantage even if one does not have an absolute advantage.