ECON 1115 Lecture Notes - Lecture 2: Resource Allocation, Opportunity Cost

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ECON 1115: Principles of Macroeconomics- Lecture 2: A Further Introduction and the
Production Possibilities Frontier
The 4 “Factors or Production”:
Land : Natural resources such as water, wood, oil, etc.
Labor : The physical and mental talents of people who contribute to the production
process
Capital : Other inputs to production that aren't people (machines, factories, tools,
computers, etc.)
Entrepreneurship : the talent of organizing land, labor, and capital to produce goods and
invent new methods of production
What Have Societies Done in the Past?
Historically, there are 3 ways societies have allocated resources:
Tradition – do what you’ve always done
Political System – ruler/leader decides how to allocate resources
Market System - the system most countries use today
A "market" is a group of buyers and sellers for a particular good or service
How Does Resource Allocation Work?:
Resource allocation involves trade-offs and costs
Economics measures the cost of resource allocation using opportunity cost
Opportunity cost: whatever must be given up to obtain some item (We will
discuss more details about opportunity cost in the next unit)
Reflects the tradeoffs that people have to make
So What Do Economists Do?:
Economists use theories and models to predict how markets will react to changes
Simplified pictures of reality used to predict cause-and-effect outcomes
Cause: "why" something happens
Effect: "what" happens
Economic models use 2 types of analysis:
Positive analysis: attempts to explain “what is”
Positive statements are objective and can be tested
Normative analysis: attempts to explain “what should be”
Normative statements are subjective and cannot be tested
Who is Involved in the Market System?:
Households (Buyers)
Maximize their utility or "happiness"
Demand goods and services
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Document Summary

Econ 1115: principles of macroeconomics- lecture 2: a further introduction and the. : natural resources such as water, wood, oil, etc. : the physical and mental talents of people who contribute to the production. : other inputs to production that aren"t people (machines, factories, tools, : the talent of organizing land, labor, and capital to produce goods and. Historically, there are 3 ways societies have allocated resources: Tradition do what you"ve always done. Political system ruler/leader decides how to allocate resources. Market system - the system most countries use today. A market is a group of buyers and sellers for a particular good or service. Economics measures the cost of resource allocation using opportunity cost. Opportunity cost: whatever must be given up to obtain some item (we will discuss more details about opportunity cost in the next unit) Reflects the tradeoffs that people have to make. Economists use theories and models to predict how markets will react to changes.

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