Ch. 1: Economics and Economic Reasoning Flashcards
Economics
The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.
Scarcity
The goods available are too few to satisfy individuals’ desires.
Microeconomics
The study of individual choice, and how that choice is influenced by economic forces. (It studies such things as the pricing policies of firms, households’ decisions on what to buy, and how markets allocate resources among alternative ends.)
Macroeconomics
The study of the economy as a whole. (Focuses on aggregate relationships such as how household consumption is related to income and how government policies can affect growth.
Marginal cost
The additional cost to you over and above the costs you have already incurred.
Sunk costs
Costs that have already been incurred and cannot be recovered
Marginal benefit
The additional benefit above what you’ve already derived.
Economic decision rule
If the marginal benefits of doing something exceed the marginal costs, do it.
If the marginal costs of doing something exceed the marginal benefits, don’t do it.
Opportunity cost
The benefit that you might have gained from choosing the next-best alternative.
Economic forces
The necessary reactions to scarcity.
Market force
An economic force that is given relatively free to rein by society to work through the market.
Invisible hand
The price mechanism, the rise and fall of prices that guides our actions in a market.
Economic model
A framework that places the generalized insights of the theory in a more specific contextual setting.
Economic principle
A commonly held economic insight stated as a law or principle.
Experimental economics
A branch of economics that studies the economy through controlled laboratory experiments.
Natural experiments
Naturally occurring events that approximate a controlled experiment where something has changed in one place but has not changed somewhere else.
Theorems
Propositions that are logically true based on the assumptions in a model.
Precepts
Policy rules that conclude that a particular course of action is preferable.
Efficiency
Achieving a goal as cheaply as possible.
Invisible hand theorem
A market economy, through the price mechanism, will tend to allocate resources efficiently. (Theories rely on simplifying assumptions, and if you don’t know the assumptions, you don’t know the theory.)
Economic policies
Actions (or inaction) taken by government to influence economic actions.
Positive economics
The study of what is, and how the economy works.
Normative economics
The study of what the goals of the economy should be.
The art of economics
The application of the knowledge learned in a positive economics to achieve the goals one has determined in normative economics.
