Econ Review

Chapter 1 Review

Positive Statement

* Can be verified with factual data

* It does not have to be correct

e.g. The moon is made of green cheese.

Normative Statement

* Based on a person’s beliefs or value system

* Cannot be verified with data

e.g. The world would be a better place if the moon was made of green cheese.

Economic Theory

* Looks at how positive statements are related

* Uses the scientific method:

* Set up a hypothesis

* Define terms, state assumptions

* Gather data to test hypothesis

* Accept, reject, or modify theory

Macroeconomics

* How the major components of an economy interact

* Unemployment, inflation, and interest rates

e.g. The rate of economic growth

Microeconomics

* Outcomes of decisions by people and firms

* Supply and demand, costs of production, and market structures

e.g. The price of iPods

Factors of Production are anything used to produce goods and services:

* Labour – Human mental and physical effort (Earns: Wages)

* Land – Any natural resource used to produce goods or services (Earns: Rent)

* Capital – Tools, equipment, factories and buildings used in production process (Earns: Interest)

* Enterprise – The human resource that innovates and takes risks (Earns: Profit)

Economic Resources

Technology

* Method of Production

* Way in which resources are combined to produce goods and services

Opportunity Cost

* The value of the next-best alternative that is given up as a result of making a particular choice

Efficiency

Productive Efficiency

* Production of an output at the lowest possible average cost

Allocative Efficiency

* Production of that combination of outputs that best satisfies consumers demands

Trade

* Voluntary trade benefits both parties

* The more trade, the greater the benefits

* Applies to individuals as well as to nations

Three fundamental Questions

1. What to produce

2. How to produce...