Econ 201 Book 1

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Compiled by J. Linn

Economics is the study of allocation of scarce resources among wants that exceed those resources 2
A good is scarce if the amount demanded exceeds the amount supplied at a zero price. 3
Resources are inputs used to produce goods and services.
Human rational self-interest is assumed.
Economics is a science, and employs the scientific method.
Theory is a set of testable hypotheses that explain observed facts. 7
The ceteris paribus condition is violated if background causes change when a hypothesis is being tested. 8
The fallacy of composition occurs when what holds for an individual acting independently is inferred to the aggregate, or vice versa 9
Positive statements are statements of fact with no value judgments. 10
Normative statements have value judgments.
Causation can be inferred from correlation, but more than one causal hypothesis may be consistent with the facts. 12
Resources are of four kinds:� land, labor, capital, entrepreneurship. 13
Skilled labor is also known as human capital.
Scarcity implies opportunity cost.
Opportunity cost is the highest-valued alternative given up when an allocating decision is made. 16
Marginal benefits and marginal costs refer to decisions made one step at a time. 17
The rule of rational choice is that an action should be taken if its marginal benefit exceeds its marginal cost. 18
An optimum exists only when marginal benefit equals marginal cost for all possible actions. 19
An optimum will change when incentives (marginal benefits or costs) are changed. 20
To have comparative advantage is to be able to produce something at a lower opportunity cost than someone else. 21
In a two-good world, if one producer has a comparative advantage in one good, the other producer has a comparative advantage in the other. 22
Specialization is the concentration of productive effort in goods in which the producer has comparative advantage. 23
To benefit from specialization requires the existence of trade. 24
Prices carry information about marginal benefits and costs in a competitive market system. 25
In a market economy, consumer sovereignty is assumed.
The circular flow model, or hydraulic model, shows the flow of factors from households through the factor markets to business, the flow of final goods and services through product markets to households, and the equal and opposite flows of funds through these markets. 27

In a two-good world, a production possibility schedule shows the possible combinations of outputs with given resources. 28
The production possibility curve, or production possibility frontier, is a graph of the production possibility schedule. 29
The points on a production possibility curve is the set of efficient combinations of inputs to produce the given outputs. 30
Points inside a production possibility curve is the set of inefficient combinations of inputs. 31
Points outside a production possibility curve are unattainable with given resources. 32
The slope at a point on the production possibility curve is the opportunity cost of one good (horizontal axis) with respect to the other (vertical axis) 33
The law of increasing opportunity cost is represented by a possibility curve that is concave to the origin (bowed outward). 34
An outward movement of the production possibility curve represents growth. 35
A market is an institution that links buyers and sellers.
Demand is the amount that buyers are willing and able to buy for a set of various hypothetical prices. 37
A demand schedule is a table that shows quantity demanded for a set of hypothetical prices. 38
A demand curve is a graph of the demand schedule.
A demand curve is traditionally shown with price on the vertical axis and quantity demanded on the horizontal axis. 40
The law of demand is that, ceteris paribus, price and quantity demanded are inversely related. 41
The substitution...
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