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ECO 108 (4)


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Stony Brook University
ECO 108

Week 1 Limits, Alternatives, and Choices  Economics defined  Economic wants to exceed productive capacity  A social science concerned with making optimal choices under conditions of scarcity The Economic Perspective (The economic perspective is essentially the lens that economists use to view the world. This lens includes three parts.)  Key features  Scarcity and choice  Resources are scarce  Choices must be made  Opportunity cost (everyone’s opportunity cost is different)  Purposeful behavior  Rational self-interest (decisions at the time appear to be beneficial)  Individuals and utility (Every choice provides some kind of utility, the goal is to maximize utility)  Firms and profit (Firms are rational because they try to maximize their profits)  Desired outcomes  Marginal analysis  Marginal benefit  Marginal cost  Marginal means “extra”  Comparison between marginal benefit and marginal cost (We will choose to do something if the marginal benefit is greater than the marginal cost because that is rational and will help to maximize utility  Theories, Principles, and Models  Economic principles  Generalizations (Economic principles are generalizations about economic behavior that are true for the average person. This means that the principles are imprecise, but they are still relevant. )  Other-things-equal assumption (The other-things-equal assumption is the ceteris paribus assumption which is common in many sciences.)  Graphical expression  Microeconomics and Macroeconomics  Microeconomics (In microeconomics specific types of industries or certain types of individuals are examined)  Decision making by individual units  Macroeconomics (In macroeconomics the entire economy is examined. Macroeconomics looks at the basic subdivisions of the economy like government, households, businesses, and international trade.)  Aggregate  Positive and Normative Economics  Positive economics (Positive economics can be supported or disproved with data. There isn’t any subjectivity.)  Deals with economic facts  Normative economics (Normative economics is what “ought to be.” It is a standard or a norm for the economy to achieve. This is subjective since everybody has different opinions about what is acceptable)  A subjective perspective of the economy  Individual’s Economizing Problem  Limited income  Unlimited wants  A budget line (A budget line is used to illustrate the greatest combinations of two goods that can be purchased with a certain amount of income. It reflects the greatest amount of these two goods that can be purchased. A budget line is created for a specific level of income so that when income changes, the budget line must shift to show the higher or lower incomes)  Attainable and unattainable options  Tradeoffs (a balancing of two opposing situations or qualities, both of which are desired, a situation in which the achieving of something you want involves the loss of something else which is also desirable, but less so)and opportunity costs (the value of the action that you do not choose, when choosing between two possible options)  Make the best choice possible  Change in income Any combination of goods inside the budget line can be purchased, but that combination of goods is not representative of the maximum that could be purchased. A budget line clearly illustrates how much of one good must be sacrificed to get more of another good (opportunity costs). Since the blue budget line represents the maximum of goods that can be purchased, any point outside (to the right) of the budget line represents a combination whose price exceeds the available income and therefore can’t be purchased. If income increases, the budget line will shift to the right. The greater the average income levels of a country, the further to the right their budget lines are shifted, enabling them to buy more total goods and services, and therefore, they have a higher standard of living.  Society’s Economizing Problem  Scarce resources (“Resources” refers to inputs that are used in the production of other goods and services.)  Land  Labor  Capital (Capital refers to all manufactured input
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