FacultyiofiArtsiandiSciencesi–iDepartmentiofiEconomicsi
ECONOMICS 211 – SPRING 2025 – RAMZI MABSOUT –
Sections 13 & 16
FinaliReviewiNotes
I- Chapteri1i–iTheiScopeiandiMethodiofiiEconomics
1. Defineieconomics.
Economicsiisitheistudyiofihowiindividualsiandisocietiesichooseitoiuseitheiscarceiresourcesithatinatureiandipreviousigenerati
onsihaveiprovided.iIniaisense,ieconomicsiisithei“scientificistudyiofirationalichoice.”
2. Stateifourireasonsiforistudyingieconomics.
Aistudyiofieconomicsihelpsioneitoilearniaiwayiofithinking,itoiunderstandisociety,itoiunderstandiglobaliaffairs,iandi toibeianii
nformedicitizen.iEssentialitoitheieconomiciwayiofithinkingiisitheiconceptiofi“opportunityicost”—
choicesiinvolveiforgoingisomeioptions.iTheibestialternativeithatiweiforgoiwheniweimakeiaichoiceioriaidecisioniisitheiopport
unityicostiofithatidecision.
3. DistinguishibetweenitheiconceptsiofiiOpportunityiCostiandiMarginaliCost.
“Marginal”iisiaifrequentlyiuseditermiinieconomicsithatiisiimportantitoiunderstandirightiaway.i“Marginal”imeansi“additional
”iori“extra.”i“Marginalicost,”ithen,imeansi“additionalicost.”iSupposeiyouibuyiainonreturnable,inontransferableiticketitoithei
zooifori$10.iThisiisinotianiadditionalicost.iYou’veipaidiwhetheriorinotiyouivisitithei zoo.
Ifiiwantsiexceeditheiresourcesitoisatisfyithoseiwants,ichoicesimustibeimadeiandisomeialternativesimustibeiforgone.iIfiyouich
ooseitoivisititheizooithisiSaturday,itheiopportunityicostiisitheivalueiofitheiactivityiyouiwouldihaveiundertakeniinstead—
thatiis,itheinextimost-
preferrediactivity.iPerhapsiitimightibeiplayingiairoundiofigolfiori studyingiforiaibigieconomicsitest.iTheiopportunityicostiofit
heitripitoitheizooiisitheivalueiyouiattachitoithationeiactivityiyouiwouldiotherwiseihaveichosen.
4. Defineimarketiefficiencyiinitermsiofiiprofitiopportunities.
Theirapidieliminationiofiprofitiopportunitiesiisiaisignalithatiaimarketiisioperatingiefficiently.iTheistockimarketiisiaigoodiexa
mpleiofithis.iIfiaifirm’sistockiisipricedi“tooilow,”iincreasedibiddingiwillidriveitheipriceihigher,ieliminatingitheiexcessiprofits.
iAtiaifarmers’imarket,iFarmeriBrownimayichargei$1.20iforiaidozenieggs,ialthoughitheigoingiratei isi$1.00.iSheimightimakei
excessiprofitsiforiaiwhile,ibutithisiwillinotipersistiinianiefficientimarket.iSustainedihighiprofitsiindicateitheipresenceiofianiine
fficientimarket.
5. Makeiclearitheidifferenceibetweenimicroeconomiciandimacroeconomiciconcerns.i
THEiSCOPEiOFiECONOMTCS:
a) Microeconomicsidealsiwithitheifunctioningiofiindividualimarketsiandiindustriesiandiwithitheibehavioriofiindividualidecisio
n-makingiunits:ibusinessifirmsiandihouseholds.
b) Macroeconomicsi looksi ati thei economyi asi ai whole.i Iti dealsi withi thei economici behaviori ofii aggregates-
nationalioutput,inationaliincome,itheioverallipriceilevel,ianditheigeneralirateiofiinflation.
c) Economicsi isi ai broadi andi diversei disciplinei withi manyi speciali fieldsi ofii inquiry.i Thesei includei economici history,iinter
nationalieconomics,iandiurbanieconomics.
6. Distinguishibetweenipositiveieconomicsiandinormativeieconomics.
iTHEiMETHODiOFiECONOMICS:
a) Economicsiasksiandiattemptsitoiansweritwoikindsiofiiquestions:ipositiveiandinormative.
Positiveieconomicsiattemptsitoiunderstandibehaviorianditheioperationiofieconomiesiwithoutimakingijudgment
siaboutiwhetheritheioutcomesiareigoodioribad.iPositiveieconomicsiisioftenidividediintoitwoiparts.iDescriptiveie
conomicsiinvolvesitheicompilationiofidataithatiaccuratelyidescribeieconomicifactsiandievents.iEconomicitheor
yiattemptsitoigeneralizeiandiexplainiwhatiisiobserved.iItiinvolvesi statementsioficauseiandieffect-
ofiactioniandireaction.
, Normativeieconomicsilooksiatitheiresultsiofieconomicibehavioriandiasksiwhetheritheyiareigoodioribadiandiwhe
theritheyicaniheiimproved.
b) Models:iAnieconomicimodeliisiaiformalistatementiofianieconomicitheory.iModelsisimplifyiandiabstractifromireality.iMode
lsianditheoriesicanibeiexpressediinimanyiways.iTheimosticommoniwaysiareiiniwords,iinigraphs,iandiiniequations.
7. Explainitheivalueiofiitheiceterisiparibusiassumptioniwithinitheicontextiofiieconomicimodeling.
EconomiciModelsiareiofteniusefulitoiisolateitheieffectsiofioneivariableionianotheriwhileiholdingi"allielseiconstant."iThisiisit
heideviceiofiiceterisiparibus.iInitestingitheirelationshipsibetweenivariablesiwithiniaimodel,iitiisiconvenientitoiassumeiceterisi
paribus:ithatialliotherivariablesihaveibeeniheldiconstant.
8. FallacyiofiiComposition
Becauseioneieventihappensibeforeianother,itheisecondieventidoesinotinecessarilyihappeniasiairesultiofitheifirst.i Toiassumeit
hati"after"iimpliesi"because"iisitoicommititheifallacyiofi“Hoc,iErgoiPropteriHoc”
TheierroneousibeliefiithatiwhatiisitrueiforiaipartiisinecessarilyitrueiforitheiwholeiisitheiFallacyiofiiComposition.
Aniexampleiofitheifallacyioficomposition:iOneipersoniatiaifootballigameiwhoistandsiupitoiseeiaigoodiplayiderivesiaibenefit,it
hereforeialliwillibenefitisimilarlyiifitheientireicrowdistandsiup.
9. Stateiandiexplainitheifouricriteriaiuseditoiassessitheioutcomesiofiieconomicipolicy.
EmpiricaliEconomicsiinvolvesitheicollectioniandiuseiofiidataitoitestieconomicitheories.iIniprinciple,itheibestimodeliisitheion
eithatiyieldsitheimostiaccurateipredictions.iToimakeipolicy,ioneimustibeicarefulitoispecifyicriteriaiforimakingijudgments.iF
ourispecificicriteriaiareiusedimostiofteniinieconomics:iEfficiency,iEquity,iGrowth,iandiStability.
10. Constructiandiinterpretibothigraphsiandilineariequations.
Economicigraphsidepictitheirelationshipibetweenivariables.iAicurveiwithiai“rising”i(positive)islopeiindicatesithatiasioneivar
iableiincreases,isoidoesitheiother.iAicurveiwithiai“falling”i(negative)islopeiindicatesithatiasioneivariableiincreasesiinivalue,it
heiotheridecreasesiinivalue.iSlopeiisieasilyimeasuredibyithei“riseioverirun”iformula—
theiextentiofiverticalichangeidividedibyitheiextentiofihorizontalichange.
Inieconomics,igraphsioftenifeatureifinancialivariablesilikei“price,”i“theiinterestirate,”iori“income.”iUsuallyitheidependentiv
ariableiisiplacedionitheiverticaliaxisianditheiindependentivariableionitheihorizontaliaxis.iWheni graphingieconomicivariable
s,iit’siaiprettyisafeibetithatitheifinancialivariableiwilligoionitheiverticaliaxisieveryitime.
11. Lexicon
CeterisiParibus Allielseiremainingiequal.iAideviceiuseditoianalyzeitheirelationshipibetweenitwoivariablesi whilei
theivaluesiofiotherivariablesiareiheldiunchanged.
DescriptiveiEconomics Theicompilationiofiidataithatidescribeiphenomenaiandifacts.
EconomiciGrowth Aniincreaseiinitheitotalioutputiofiianieconomy.
EconomiciTheory Aistatementiorisetiofiirelatedistatementsiabouticauseiandieffect,iactioniandireaction.
Economics Theistudyiofihowiindividualsiandisocietiesichooseihowitoiuseitheiscarceiresourcesithati natureian
dipreviousigenerationsihaveiprovided.
Efficiency Ini economics,i “Allocativei Efficiency”.i Ani efficienti economyi isi onei thati producesi whati peo
pleiwantiatitheileastipossibleicost.
EfficientiMarket Aimarketiiniwhichiprofitiopportunitiesiareieliminatedialmostiinstantaneously.
EmpiricaliEconomics Theicollectioniandiuseiofiidataitoitestieconomicitheories.
Equity Fairness
FallacyiofiiComposition Theierroneousibeliefiithatiwhatiisitrueiforiaipartiisinecessarilyitrueiforitheiwhole.
IndustrialiRevolution TheiperiodiiniEnglandiduringitheilateieighteenthiandiearlyinineteenthicenturiesiiniwhichi newi
manufacturingitechnologiesiandiimproveditransportationigaveiriseitoitheimoderni factoryisyst
emiandiaimassiveimovementiofitheipopulationifromitheicountrysideitoithei cities.
Pagei2iofi76
, Macroeconomics Theibranchiofieconomicsithatiexaminesitheieconomicibehaviori ofii aggregates,iincome,i employ
ment,ioutput,iandisoion;iallioniainationaliscale.
Marginalism Thei processi ofii analyzingi thei additionali ori incrementali costsi ori benefitsi arisingi fromi ai choic
eioridecision.
Microeconomics TheibranchiofieconomicsithatiexaminesitheifunctioningiofiIndividualiindustriesiandithei behavi
oriofiIndividualidecision-makingiunits·iThatiisifirmsiandihouseholds.
Model Ai formali statementi ofii ai theory.i Usuallyi ai mathematicali statementi ofii ai presumedi relati
onshipibetweenitwoiorimoreivariables.
NormativeiEconomics Aniapproachitoieconomicsithatianalyzesioutcomesiofiieconomicibehavior,ievaluatesithemi asigo
odioribad,iandimayiprescribeicoursesiofiaction.iAlsoicalledipolicyieconomics.
Ockham'sirazor Theiprincipleithatiirrelevantidetailishouldibeicutiaway.
OpportunityiCost Theibestialternativeithatiweiforgo,iorigiveiup,iwheniweimakeiaichoiceioriaidecision.
PositiveiEconomics Ani approachi toi economicsi thati seeksi toi understandi behaviori andi thei operationi ofii syste
msiwithoutimakingijudgments.iItidescribesiwhatiexistsiandihowiitiworks.
PostiHoc,iErgoiPropteriHoc Literally,i"afterithisi(initime),ithereforeibecauseiofithis."iAicommonierrorimadeiini chinkingia
bouticausation:iIfiiEventiAihappensibeforeiEventiB,iitiisinotinecessarilyitrueithati AicausediB.
Scarce Limited
Stability Ai conditioni ini whichi nationali outputi isi growingi steadily,i withi lowi inflationi andi fulli empl
oymentiofiresources.
SunkiCosts Costsithaticannotibeiavoidedibecauseitheyihaveialreadyibeeniincurred.
Variable Aimeasureithaticanichangeifromitimeitoitimeiorifromiobservationitoiobservation.
12. GraphicsiLexiconi(Appendix):
CartesianiCoordinateiSystem Aicommonimethodiofiigraphingitwoivariablesithatimakesiuseiofiitwoiperpendicularilinesi agai
nstiwhichitheivariablesiareiplotted.
Graph Aitwo-dimensionalirepresentationiofiiaisetiofiinumbersioridata.
NegativeiRelationship Airelationshipibetweenitwoivariables,iXiandiY,iiniwhichiaidecreaseiiniXiisiassociatedi withia
niincreaseiiniYiandianiincreaseiiniXiisiassociatediwithiaidecreaseiiniY.
Origin OniaiCartesianicoordinateisystem,itheipointiatiwhichitheihorizontaliandiverticaliaxesi intersect.
PositiveiRelationship Airelationshipibetweenitwoivariables,iXiandiY,iiniwhichiaidecreaseiiniXi isiassociatedi withiai
decreaseiiniYiandianiincreaseiiniXiisiassociatediwithianiincreaseiiniY.
Slope Aimeasurementithatiindicatesiwhetheritheirelationshipibetweenivariablesiisipositiveiori nega
tiveiandihowimuchiofiairesponseithereiisiiniYi(theivariableionitheiverticaliaxis)i wheniXi(thei
variableionitheihorizontaliaxis)ichanges.
TimeiSeriesiGraph Aigraphiillustratingihowiaivariableichangesioveritime.
X-Axis Oni ai Cartesiani coordinatei system,i thei horizontali linei againsti whichi ai variablei isi plotte
d.
X-Intercept TheipointiatiwhichiaigraphiintersectsitheiX-Axis.
Y-Axis OniaiCartesianicoordinateisystem,itheiverticalilineiagainstiwhichiaivariableiisiplotted.
Y-Intercept TheipointiatiwhichiaigraphiintersectsitheiY-Axis.
Pagei3iofi76
, II- Chapteri2i–iTheiEconomiciProblem:iScarcityiandiChoice
1. Identifyitheithreeibasicieconomiciquestions.
Everyisocietyihasisomeisystemioriprocessiforitransformingiintoiusefuliformiwhatinatureiandipreviousigenerationsihaveiprovi
ded.iEconomicsiisitheistudyiofithatiprocessiandiitsioutcomes.
Producersi arei thosei whoi takei resourcesi andi transformi themi intoi usablei products,i ori outputs.i Privatei firms,ihousehold
s,iandigovernmentsialliproduceisomething.
Alli societiesi musti answeri threei basici questions:i Whati getsi produced?i Howi isi iti produced?
i Whoi getsi whati isiproduced?iTheseithreeiquestionsimakeiupitheiEconomiciProblem.
Iniaicomplexisociety,itheiopportunityitoicooperateiandispecializeioffersigreatiscopeiforiincreasediproduction—
butidecisionsimustibeimadeiregardingitheiextentioficooperation,iwhoispecializesiiniwhat,iandihowigoodsiareidistributed.iEv
eniRobinsoniCrusoeiandiFridayionitheirihypotheticaliislandimusticomeiupiwithianswersitoitheseiquestions.iWantsiareilimitl
ess,ibutiresourcesiareiscarce.iWeiareicompelleditoimakeichoices.iWheniaisocietyi consistsiofimoreithanioneiperson,iquestio
nsiofidistribution,icooperation,iandispecializationiarise.
Becauseiresourcesiareiscarceirelativeitoihumaniwantsiiniallisocieties,iusingiresourcesitoiproduceioneigoodioriserviceiimplies
inotiusingithemitoiproduceisomethingielse.iThisiconceptiofiOpportunityiCostiisicentralitoianiunderstandingiofii economics.i
Constrainedichoiceioccurs,iforiexample,iwheniyouigoitoitheigroceryistoreiwithionlyia
$20ibilliiniyouripocket—
youihaveitoimakeichoicesibasedionithisilimitation.iUnconstrainedichoiceiwouldibeiifiyouiwereialloweditoitakeiasimanyigroc
eriesihomeiasiyouiwanted,ifreeioficharge.iSadly,ithough,iweiknowithere’si“noisuchithingiasiaifreeilunch.”
Practicaliexamplesiofitheiconsequencesiandicostsiofichoiceiinclude:ipresentivs.ifutureibenefitsi(doiyouistudyihardinowisoith
atiatiexamitimeireviewingiisieasier,ioridoiyouitakeiitieasyinowiandisweatiitibeforeitheiexam?),iandicapitalivs.iconsumeriprod
uctioni(shouldiweiproduceitaxicabsiorisportsicars?).iUsingiresourcesitoiproduceicapitalithatiwilli initurniproduceibenefitsiini
theifutureiimpliesinotiusingithoseiresourcesitoiproduceiconsumerigoodsiinitheipresent.
Toicalculateiopportunityicost,iuseithei“giveiupitoiget”iapproach.iIfiyouicanidetermineiwhati(next-
best)ichoiceiwasiforgoneitoigetiyouripreferrediselection,iyouihaveideterminediopportunityicost.iThisiisimosticlearlyiseeniasi
aimovementialongiaiproductionipossibilityifrontier.
2. Absolutei Advantagei andi Comparativei Advantage.i Relatei Comparativei Advantagei toi thei theoryi thati individualsi ca
nigainifromispecializationiandiexchange.
AiproducerihasianiabsoluteiadvantageiinitheiproductioniofiGoodiAiif,icomparediwithianotheriproducer,iheicaniproduceiGo
odiAimoreiefficiently.iAiproducerihasiaicomparativeiadvantageiinitheiproductioniofiGoodiAiif,i comparediwithianotheripro
ducer,iheicaniproduceiGoodiAiatiailoweriopportunityicost.
Specializationianditradeibasedionicomparativeiadvantageiletsieachiparticipantiachieveiaihighericonsumptionilevelithaniwou
ldiotherwiseibeipossible.iEachiparticipanticaniliveioutsideitheiconstraintsiofihisiowniproductioniopportunities.
Eveniifioneiindividualiorinationiisiabsolutelyimoreiefficientiatiproducingigoodsithanianother,iallipartiesiwilligainiifitheyispec
ializeiiniproducingigoodsiiniwhichitheyihaveiaicomparativeiadvantage.
Comparativeiadvantageihingesionitheiconceptiofiopportunityicost.iTheiproduceri(person,ifirm,ioricountry)iwithitheilowesti
opportunityicostiholdsitheicomparativeiadvantageiinithatiproduct.iDon’tibeimisled—
itiisiirrelevantitoicomparativeiadvantageiwhetheriorinotitheiproducericaniproducei moreiofiitheigood.iTheiissueirevolvesiaro
undithe
Pagei4iofi76
ECONOMICS 211 – SPRING 2025 – RAMZI MABSOUT –
Sections 13 & 16
FinaliReviewiNotes
I- Chapteri1i–iTheiScopeiandiMethodiofiiEconomics
1. Defineieconomics.
Economicsiisitheistudyiofihowiindividualsiandisocietiesichooseitoiuseitheiscarceiresourcesithatinatureiandipreviousigenerati
onsihaveiprovided.iIniaisense,ieconomicsiisithei“scientificistudyiofirationalichoice.”
2. Stateifourireasonsiforistudyingieconomics.
Aistudyiofieconomicsihelpsioneitoilearniaiwayiofithinking,itoiunderstandisociety,itoiunderstandiglobaliaffairs,iandi toibeianii
nformedicitizen.iEssentialitoitheieconomiciwayiofithinkingiisitheiconceptiofi“opportunityicost”—
choicesiinvolveiforgoingisomeioptions.iTheibestialternativeithatiweiforgoiwheniweimakeiaichoiceioriaidecisioniisitheiopport
unityicostiofithatidecision.
3. DistinguishibetweenitheiconceptsiofiiOpportunityiCostiandiMarginaliCost.
“Marginal”iisiaifrequentlyiuseditermiinieconomicsithatiisiimportantitoiunderstandirightiaway.i“Marginal”imeansi“additional
”iori“extra.”i“Marginalicost,”ithen,imeansi“additionalicost.”iSupposeiyouibuyiainonreturnable,inontransferableiticketitoithei
zooifori$10.iThisiisinotianiadditionalicost.iYou’veipaidiwhetheriorinotiyouivisitithei zoo.
Ifiiwantsiexceeditheiresourcesitoisatisfyithoseiwants,ichoicesimustibeimadeiandisomeialternativesimustibeiforgone.iIfiyouich
ooseitoivisititheizooithisiSaturday,itheiopportunityicostiisitheivalueiofitheiactivityiyouiwouldihaveiundertakeniinstead—
thatiis,itheinextimost-
preferrediactivity.iPerhapsiitimightibeiplayingiairoundiofigolfiori studyingiforiaibigieconomicsitest.iTheiopportunityicostiofit
heitripitoitheizooiisitheivalueiyouiattachitoithationeiactivityiyouiwouldiotherwiseihaveichosen.
4. Defineimarketiefficiencyiinitermsiofiiprofitiopportunities.
Theirapidieliminationiofiprofitiopportunitiesiisiaisignalithatiaimarketiisioperatingiefficiently.iTheistockimarketiisiaigoodiexa
mpleiofithis.iIfiaifirm’sistockiisipricedi“tooilow,”iincreasedibiddingiwillidriveitheipriceihigher,ieliminatingitheiexcessiprofits.
iAtiaifarmers’imarket,iFarmeriBrownimayichargei$1.20iforiaidozenieggs,ialthoughitheigoingiratei isi$1.00.iSheimightimakei
excessiprofitsiforiaiwhile,ibutithisiwillinotipersistiinianiefficientimarket.iSustainedihighiprofitsiindicateitheipresenceiofianiine
fficientimarket.
5. Makeiclearitheidifferenceibetweenimicroeconomiciandimacroeconomiciconcerns.i
THEiSCOPEiOFiECONOMTCS:
a) Microeconomicsidealsiwithitheifunctioningiofiindividualimarketsiandiindustriesiandiwithitheibehavioriofiindividualidecisio
n-makingiunits:ibusinessifirmsiandihouseholds.
b) Macroeconomicsi looksi ati thei economyi asi ai whole.i Iti dealsi withi thei economici behaviori ofii aggregates-
nationalioutput,inationaliincome,itheioverallipriceilevel,ianditheigeneralirateiofiinflation.
c) Economicsi isi ai broadi andi diversei disciplinei withi manyi speciali fieldsi ofii inquiry.i Thesei includei economici history,iinter
nationalieconomics,iandiurbanieconomics.
6. Distinguishibetweenipositiveieconomicsiandinormativeieconomics.
iTHEiMETHODiOFiECONOMICS:
a) Economicsiasksiandiattemptsitoiansweritwoikindsiofiiquestions:ipositiveiandinormative.
Positiveieconomicsiattemptsitoiunderstandibehaviorianditheioperationiofieconomiesiwithoutimakingijudgment
siaboutiwhetheritheioutcomesiareigoodioribad.iPositiveieconomicsiisioftenidividediintoitwoiparts.iDescriptiveie
conomicsiinvolvesitheicompilationiofidataithatiaccuratelyidescribeieconomicifactsiandievents.iEconomicitheor
yiattemptsitoigeneralizeiandiexplainiwhatiisiobserved.iItiinvolvesi statementsioficauseiandieffect-
ofiactioniandireaction.
, Normativeieconomicsilooksiatitheiresultsiofieconomicibehavioriandiasksiwhetheritheyiareigoodioribadiandiwhe
theritheyicaniheiimproved.
b) Models:iAnieconomicimodeliisiaiformalistatementiofianieconomicitheory.iModelsisimplifyiandiabstractifromireality.iMode
lsianditheoriesicanibeiexpressediinimanyiways.iTheimosticommoniwaysiareiiniwords,iinigraphs,iandiiniequations.
7. Explainitheivalueiofiitheiceterisiparibusiassumptioniwithinitheicontextiofiieconomicimodeling.
EconomiciModelsiareiofteniusefulitoiisolateitheieffectsiofioneivariableionianotheriwhileiholdingi"allielseiconstant."iThisiisit
heideviceiofiiceterisiparibus.iInitestingitheirelationshipsibetweenivariablesiwithiniaimodel,iitiisiconvenientitoiassumeiceterisi
paribus:ithatialliotherivariablesihaveibeeniheldiconstant.
8. FallacyiofiiComposition
Becauseioneieventihappensibeforeianother,itheisecondieventidoesinotinecessarilyihappeniasiairesultiofitheifirst.i Toiassumeit
hati"after"iimpliesi"because"iisitoicommititheifallacyiofi“Hoc,iErgoiPropteriHoc”
TheierroneousibeliefiithatiwhatiisitrueiforiaipartiisinecessarilyitrueiforitheiwholeiisitheiFallacyiofiiComposition.
Aniexampleiofitheifallacyioficomposition:iOneipersoniatiaifootballigameiwhoistandsiupitoiseeiaigoodiplayiderivesiaibenefit,it
hereforeialliwillibenefitisimilarlyiifitheientireicrowdistandsiup.
9. Stateiandiexplainitheifouricriteriaiuseditoiassessitheioutcomesiofiieconomicipolicy.
EmpiricaliEconomicsiinvolvesitheicollectioniandiuseiofiidataitoitestieconomicitheories.iIniprinciple,itheibestimodeliisitheion
eithatiyieldsitheimostiaccurateipredictions.iToimakeipolicy,ioneimustibeicarefulitoispecifyicriteriaiforimakingijudgments.iF
ourispecificicriteriaiareiusedimostiofteniinieconomics:iEfficiency,iEquity,iGrowth,iandiStability.
10. Constructiandiinterpretibothigraphsiandilineariequations.
Economicigraphsidepictitheirelationshipibetweenivariables.iAicurveiwithiai“rising”i(positive)islopeiindicatesithatiasioneivar
iableiincreases,isoidoesitheiother.iAicurveiwithiai“falling”i(negative)islopeiindicatesithatiasioneivariableiincreasesiinivalue,it
heiotheridecreasesiinivalue.iSlopeiisieasilyimeasuredibyithei“riseioverirun”iformula—
theiextentiofiverticalichangeidividedibyitheiextentiofihorizontalichange.
Inieconomics,igraphsioftenifeatureifinancialivariablesilikei“price,”i“theiinterestirate,”iori“income.”iUsuallyitheidependentiv
ariableiisiplacedionitheiverticaliaxisianditheiindependentivariableionitheihorizontaliaxis.iWheni graphingieconomicivariable
s,iit’siaiprettyisafeibetithatitheifinancialivariableiwilligoionitheiverticaliaxisieveryitime.
11. Lexicon
CeterisiParibus Allielseiremainingiequal.iAideviceiuseditoianalyzeitheirelationshipibetweenitwoivariablesi whilei
theivaluesiofiotherivariablesiareiheldiunchanged.
DescriptiveiEconomics Theicompilationiofiidataithatidescribeiphenomenaiandifacts.
EconomiciGrowth Aniincreaseiinitheitotalioutputiofiianieconomy.
EconomiciTheory Aistatementiorisetiofiirelatedistatementsiabouticauseiandieffect,iactioniandireaction.
Economics Theistudyiofihowiindividualsiandisocietiesichooseihowitoiuseitheiscarceiresourcesithati natureian
dipreviousigenerationsihaveiprovided.
Efficiency Ini economics,i “Allocativei Efficiency”.i Ani efficienti economyi isi onei thati producesi whati peo
pleiwantiatitheileastipossibleicost.
EfficientiMarket Aimarketiiniwhichiprofitiopportunitiesiareieliminatedialmostiinstantaneously.
EmpiricaliEconomics Theicollectioniandiuseiofiidataitoitestieconomicitheories.
Equity Fairness
FallacyiofiiComposition Theierroneousibeliefiithatiwhatiisitrueiforiaipartiisinecessarilyitrueiforitheiwhole.
IndustrialiRevolution TheiperiodiiniEnglandiduringitheilateieighteenthiandiearlyinineteenthicenturiesiiniwhichi newi
manufacturingitechnologiesiandiimproveditransportationigaveiriseitoitheimoderni factoryisyst
emiandiaimassiveimovementiofitheipopulationifromitheicountrysideitoithei cities.
Pagei2iofi76
, Macroeconomics Theibranchiofieconomicsithatiexaminesitheieconomicibehaviori ofii aggregates,iincome,i employ
ment,ioutput,iandisoion;iallioniainationaliscale.
Marginalism Thei processi ofii analyzingi thei additionali ori incrementali costsi ori benefitsi arisingi fromi ai choic
eioridecision.
Microeconomics TheibranchiofieconomicsithatiexaminesitheifunctioningiofiIndividualiindustriesiandithei behavi
oriofiIndividualidecision-makingiunits·iThatiisifirmsiandihouseholds.
Model Ai formali statementi ofii ai theory.i Usuallyi ai mathematicali statementi ofii ai presumedi relati
onshipibetweenitwoiorimoreivariables.
NormativeiEconomics Aniapproachitoieconomicsithatianalyzesioutcomesiofiieconomicibehavior,ievaluatesithemi asigo
odioribad,iandimayiprescribeicoursesiofiaction.iAlsoicalledipolicyieconomics.
Ockham'sirazor Theiprincipleithatiirrelevantidetailishouldibeicutiaway.
OpportunityiCost Theibestialternativeithatiweiforgo,iorigiveiup,iwheniweimakeiaichoiceioriaidecision.
PositiveiEconomics Ani approachi toi economicsi thati seeksi toi understandi behaviori andi thei operationi ofii syste
msiwithoutimakingijudgments.iItidescribesiwhatiexistsiandihowiitiworks.
PostiHoc,iErgoiPropteriHoc Literally,i"afterithisi(initime),ithereforeibecauseiofithis."iAicommonierrorimadeiini chinkingia
bouticausation:iIfiiEventiAihappensibeforeiEventiB,iitiisinotinecessarilyitrueithati AicausediB.
Scarce Limited
Stability Ai conditioni ini whichi nationali outputi isi growingi steadily,i withi lowi inflationi andi fulli empl
oymentiofiresources.
SunkiCosts Costsithaticannotibeiavoidedibecauseitheyihaveialreadyibeeniincurred.
Variable Aimeasureithaticanichangeifromitimeitoitimeiorifromiobservationitoiobservation.
12. GraphicsiLexiconi(Appendix):
CartesianiCoordinateiSystem Aicommonimethodiofiigraphingitwoivariablesithatimakesiuseiofiitwoiperpendicularilinesi agai
nstiwhichitheivariablesiareiplotted.
Graph Aitwo-dimensionalirepresentationiofiiaisetiofiinumbersioridata.
NegativeiRelationship Airelationshipibetweenitwoivariables,iXiandiY,iiniwhichiaidecreaseiiniXiisiassociatedi withia
niincreaseiiniYiandianiincreaseiiniXiisiassociatediwithiaidecreaseiiniY.
Origin OniaiCartesianicoordinateisystem,itheipointiatiwhichitheihorizontaliandiverticaliaxesi intersect.
PositiveiRelationship Airelationshipibetweenitwoivariables,iXiandiY,iiniwhichiaidecreaseiiniXi isiassociatedi withiai
decreaseiiniYiandianiincreaseiiniXiisiassociatediwithianiincreaseiiniY.
Slope Aimeasurementithatiindicatesiwhetheritheirelationshipibetweenivariablesiisipositiveiori nega
tiveiandihowimuchiofiairesponseithereiisiiniYi(theivariableionitheiverticaliaxis)i wheniXi(thei
variableionitheihorizontaliaxis)ichanges.
TimeiSeriesiGraph Aigraphiillustratingihowiaivariableichangesioveritime.
X-Axis Oni ai Cartesiani coordinatei system,i thei horizontali linei againsti whichi ai variablei isi plotte
d.
X-Intercept TheipointiatiwhichiaigraphiintersectsitheiX-Axis.
Y-Axis OniaiCartesianicoordinateisystem,itheiverticalilineiagainstiwhichiaivariableiisiplotted.
Y-Intercept TheipointiatiwhichiaigraphiintersectsitheiY-Axis.
Pagei3iofi76
, II- Chapteri2i–iTheiEconomiciProblem:iScarcityiandiChoice
1. Identifyitheithreeibasicieconomiciquestions.
Everyisocietyihasisomeisystemioriprocessiforitransformingiintoiusefuliformiwhatinatureiandipreviousigenerationsihaveiprovi
ded.iEconomicsiisitheistudyiofithatiprocessiandiitsioutcomes.
Producersi arei thosei whoi takei resourcesi andi transformi themi intoi usablei products,i ori outputs.i Privatei firms,ihousehold
s,iandigovernmentsialliproduceisomething.
Alli societiesi musti answeri threei basici questions:i Whati getsi produced?i Howi isi iti produced?
i Whoi getsi whati isiproduced?iTheseithreeiquestionsimakeiupitheiEconomiciProblem.
Iniaicomplexisociety,itheiopportunityitoicooperateiandispecializeioffersigreatiscopeiforiincreasediproduction—
butidecisionsimustibeimadeiregardingitheiextentioficooperation,iwhoispecializesiiniwhat,iandihowigoodsiareidistributed.iEv
eniRobinsoniCrusoeiandiFridayionitheirihypotheticaliislandimusticomeiupiwithianswersitoitheseiquestions.iWantsiareilimitl
ess,ibutiresourcesiareiscarce.iWeiareicompelleditoimakeichoices.iWheniaisocietyi consistsiofimoreithanioneiperson,iquestio
nsiofidistribution,icooperation,iandispecializationiarise.
Becauseiresourcesiareiscarceirelativeitoihumaniwantsiiniallisocieties,iusingiresourcesitoiproduceioneigoodioriserviceiimplies
inotiusingithemitoiproduceisomethingielse.iThisiconceptiofiOpportunityiCostiisicentralitoianiunderstandingiofii economics.i
Constrainedichoiceioccurs,iforiexample,iwheniyouigoitoitheigroceryistoreiwithionlyia
$20ibilliiniyouripocket—
youihaveitoimakeichoicesibasedionithisilimitation.iUnconstrainedichoiceiwouldibeiifiyouiwereialloweditoitakeiasimanyigroc
eriesihomeiasiyouiwanted,ifreeioficharge.iSadly,ithough,iweiknowithere’si“noisuchithingiasiaifreeilunch.”
Practicaliexamplesiofitheiconsequencesiandicostsiofichoiceiinclude:ipresentivs.ifutureibenefitsi(doiyouistudyihardinowisoith
atiatiexamitimeireviewingiisieasier,ioridoiyouitakeiitieasyinowiandisweatiitibeforeitheiexam?),iandicapitalivs.iconsumeriprod
uctioni(shouldiweiproduceitaxicabsiorisportsicars?).iUsingiresourcesitoiproduceicapitalithatiwilli initurniproduceibenefitsiini
theifutureiimpliesinotiusingithoseiresourcesitoiproduceiconsumerigoodsiinitheipresent.
Toicalculateiopportunityicost,iuseithei“giveiupitoiget”iapproach.iIfiyouicanidetermineiwhati(next-
best)ichoiceiwasiforgoneitoigetiyouripreferrediselection,iyouihaveideterminediopportunityicost.iThisiisimosticlearlyiseeniasi
aimovementialongiaiproductionipossibilityifrontier.
2. Absolutei Advantagei andi Comparativei Advantage.i Relatei Comparativei Advantagei toi thei theoryi thati individualsi ca
nigainifromispecializationiandiexchange.
AiproducerihasianiabsoluteiadvantageiinitheiproductioniofiGoodiAiif,icomparediwithianotheriproducer,iheicaniproduceiGo
odiAimoreiefficiently.iAiproducerihasiaicomparativeiadvantageiinitheiproductioniofiGoodiAiif,i comparediwithianotheripro
ducer,iheicaniproduceiGoodiAiatiailoweriopportunityicost.
Specializationianditradeibasedionicomparativeiadvantageiletsieachiparticipantiachieveiaihighericonsumptionilevelithaniwou
ldiotherwiseibeipossible.iEachiparticipanticaniliveioutsideitheiconstraintsiofihisiowniproductioniopportunities.
Eveniifioneiindividualiorinationiisiabsolutelyimoreiefficientiatiproducingigoodsithanianother,iallipartiesiwilligainiifitheyispec
ializeiiniproducingigoodsiiniwhichitheyihaveiaicomparativeiadvantage.
Comparativeiadvantageihingesionitheiconceptiofiopportunityicost.iTheiproduceri(person,ifirm,ioricountry)iwithitheilowesti
opportunityicostiholdsitheicomparativeiadvantageiinithatiproduct.iDon’tibeimisled—
itiisiirrelevantitoicomparativeiadvantageiwhetheriorinotitheiproducericaniproducei moreiofiitheigood.iTheiissueirevolvesiaro
undithe
Pagei4iofi76
