CH1

People respond to economic incentives and will only do something if the benefits outweigh the costs.
Opportunity cost is the highest valued alternative you have to sacrifice in order to something else.
Theres always a trade-off because of scarcity; if you produce more of one thing youll produce less
of another (like conservation of mass!). Society has to think about goods and services - what will be
produced, how, and who will receive.
Centrally planned economy (usually dictatorships) is when the government decides how the
economic resources are allocated, while a market economy is when the households and firms
interacting make the decisions. A mixed economy is when most decisions are from buyers/sellers,
but the government also makes some decisions (eg. Canada, US, Japan)
Efficiency is really important but can be a trade off to equity. Productive efficiency is when stuff is
produced at the lowest cost. Allocative efficiency is when its produced according to consumer
preferences until the last unit provides the same benefit as the cost of producing it (for example,
everyone gets a pair of mittens). In voluntary exchange both buyers and sellers are made better off
(otherwise they wouldnt have sold/bought). Equity is when economic benefits are distributed fairly,
like raising taxes on higher income people.
Use models to represent economic situations. An economic variable is a measurable thing that can
have different values, eg income. When we do analysis, economists use positive analysis (what is),
rather than normative (what ought to be). Positive can tell you the consequences of a policy, but not
whether its good or bad. (minimum wage example; 7.25 as min wage in positive analysis we can
see that its good for those that earn 7.25 bc theyre paid higher than what some employers would
pay them, but bad for people who employers wouldnt pay 7.25 for. but we cant say whether this
gain or loss is good or bad.)
Micro is the choices of households and firms, explaining reactions to changes in prices and how
firms decide what to charge. Macro is the study of the whole economy, inflation, unemployment,
economic growth. Capital can be financial or physical; financial is like stocks and bonds, back
accounts, holdings of money. Capital usually refers in economics to physical capitals like
manufactured goods used to produce other goods - like, computers and buildings and trucks. Total
amount of physical capital in a country is called capital stock. Human capital is a persons training
and skills; eg college people usually have more skills than high school degree people.
CH 2

Production possibilities frontier: a curve showing the maximum combinations of 2 products that can
be produced with the resources and technology. Any point under the curve is inefficient because
youre not using all the available resources, and any point above it is unattainable because you dont
have enough resources to reach that point.