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Micro Unit 1

#topic/econ

5 Key Economic Assumptions

  1. Society has unlimited wants and limited resources (scarcity).
  2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off).
  3. Everyone's goal is to make choices that maximize their satisfaction. Everyone acts in their own "self-interest."
  4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.
  5. Real-life situations can be explained and analyzed through simplified models and graphs.

Alternative ways that an economy can use its scarce resources is shown in Production Possibilities Curve

Trade-Offs Vs Opportunity Cost

All the alternatives that we give up when we make a choice.

Most desirable alternative given up when we make a choice.

Alternative ways that an economy can use its scarce resources is shown inProduction Possibilities Curve.

Countries can expand their possibility point through Specialization and Trade

Countries should trade if they have a relatively lower opportunity cost in producing a good

Countries should specialize in the good that is cheaper for them to produce (the one in which they have a comparative advantage)