Chapter 2: The Discipline of Economics
- Economics Defined
- Economics
- A social science that studies how resources are used and is often concerned with how resources can be used to their fullest potential
- Macroeconomics versus Microeconomics
- Macroeconomics
- Involves economic problems encountered by the nation as a whole
- Microeconomics
- Concerned with the economic problems faced by individual units within the overall economy (families, individuals, firms)
- Positive versus Normative Economics
- Positive Economics
- Based on the scientific method
- hypotheses formulated and tested with experiments
- Normative Economics
- Involves value judgments and opinions
- Based on the way someone believes things ought to be
- No scientific investigation involved
- Resources
- Resource
- Anything that can be used to produce a good or service
- Categories
- Land
- all natural resources
- Labor
- all human attributes that are productive
- service, function, or task performed to produce something
- Capital
- productive equipment or machinery
- Opportunity Cost
- Opportunity Cost
- What must be sacrificed in order to obtain something
- Efficiency
- Implies using resources to their fullest potential
- Mathematically
- Opportunity cost of Good X = Change in Good Y production / Change in Good X production
- Will always equal some number of units of Good Y
- In Terms of Macroeconomics
- If a nation decides to produce one more unit of Good X, how many units of Good Y will be sacrificed?
- Production Possibilities Frontier
- Definition
- The graphical portrayal of hypothetical production possibilities
- Shows the combinations of two goods that can be produced if the economy uses all of its resources fully and efficiently
- Points Inside the Frontier
- Resources are not being used fully or efficiently
- Points outside the Frontier
- Unobtainable at this time
- May be obtained in the future because the frontier may shift
- Factors that Cause a Shift
- Changes in the amount of resources in the economy
- population growth/decline
- new territories acquired
- devastating war or weather
- Changes in technology and productivity
- government regulation or tradition
- Law of Increasing Costs
- Law of Increasing Costs
- As more of a product is produced, the opportunity cost increases
- Production Possibilities Frontier
- Line that is curved concave to the origin
- Cause/Reason
- Some resources are more adept at the production of one good than another
- The opportunity cost of producing a good becomes greater as more resources are forced into industries where they are not as productive
- Comparative Advantage
- The Law of Comparative Advantage
- David Ricardo 1800’s
- An application of opportunity cost
- Advocates specialization for increased output
- Forms the basis for the widespread support of free trade
- Absolute Advantage
- The ability to produce something more efficiently
- Comparative Advantage
- The ability to produce something with a lower opportunity cost
- Implications
- Trade can be mutually advantageous to both countries even if one country has the absolute advantage in all products
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Aboukhadijeh, Feross. "Chapter 2: The Discipline of Economics" StudyNotes.org. WebTorrent, LLC., 12 Oct. 2013. Web. 06 Nov. 2026. <https://www.apstudynotes.org/microeconomics/outlines/chapter-2-the-discipline-of-economics/>.
