Ch 1: 5 Foundations of Economics Flashcards
Scarcity
refers to the limited nature of society’s resources, given society’s unlimited wants and needs
Economics
the study of how people allocate their limited resources. How people make choices
the study of economics is divided into two fields and difference
microeconomics and macroeconomics;
Difference between a mico and macro issue is that micro is an individual’s decision while macro is an observation of economy
Microeconomics
the study of the individual (units) that make up the economy
Macroeconomics
the study of the overall aspects and workings of an economy, such as inflation, growth, employment,interest rates, and the productivity of the economy as a whole
The five foundations of economics are:
incentives; trade-offs; opportunity cost; marginal thinking; the principle that trade creates value
Incentives
reward or penalty that motivate you to act (or to exert effort)
Positive incentives
those that encourage action with positive reward (bonus at work; Work harder)
Negative incentives
a penalty that spurs individuals to action ( fear of speed ticket if you speed or brush teeth regularly so no trip to dentist)
Direct incentives
absolute and easy to recognize (Cut my grass and I’ll pay you $30)
Indirect incentives
It is the byproduct behavior of the direct incentive that changes behavior of benefit consumer, but not supplier
unintended consequences
the repercussions and aftermath unintended from said incentives (get baby bonus from gov. for babies born after July 1. couples delay births so they can get that bonus. this is the unintended consequence)
Trade off
Given limited resources(time; money; energy), there is a compromise when a choice is made. (Going to school instead of working) (pg 12)
Opportunity cost
The highest-valued alternative that must be sacrificed once a choice is made. The key to making the best possible decision is to minimize your opportunity cost by selecting the option that gives you the largest benefit (if you prefer concert over hiking and both are your options, then the hiking is your low opportunity cost since not going to concert is a high opportunity cost)
Marginal thinking
requires decision-makers to evaluate whether the benefit of one more unit outweigh its cost (pg15) Its Cost/Benefit analysis
Trade
voluntary exchange of goods and services between two or more parties. Voluntary trade among rational individuals creates value for everyone involved
Comparative advantage
refers to the situation in which one (individual, business, or country) can produce at a lower opportunity cost than a competitor can. Specializing lowers ones opportunity cost
Economic Thinking
an intentional evaluation of the available opportunities to make the best decision possible
Markets
a system that brings buyers and sellers together to exchange goods and services. (Think Ebay)
Barter
the trade of a good or service without using traditional currency