Ch. 1 Foundations and Models Flashcards
Economics
study of choices people make to attain their goals given scarce resources
Scarcity
unlimited wants exceed the limited resources
Economic Model
simplified version of reality used to analyze real-world situations
Market
group of buyers and sellers and the arrangement they come together to trade
3 Key Economic Ideas
- People are rational 2. People response to economic incentives 3. Optimal decisions are made at the margin
Trade-off
bc of scarcity, making more of one thing means producing less of another
Opportunity Cost
the highest valued alternative that must be given up in order to engage in an activity: force society to answer 3 fundamental questions
3 Fundamental Questions
- What will be produced 2. How will they be produced 3. Who will receive what is produced
Centrally Planned Economy
the government decides how economic resources will be allocated
Market Economy
decisions of households and firms allocate economic resources
Mixed Economy
most economic decisions from buyer/seller interaction but the government plays a significant role in allocation of resources
Productive Efficieny
when a good/service is produced at the lowest possible cost
Allocative Efficiency
when production is in accordance to consumer preferences (marginal benefit always equal or more than marginal cost)
Voluntary Exchange
situation when buyer and seller both made better off by a transaction
Equity
fair distribution of economic benefits
Economic Model 5 Steps
- Assumptions 2. Hypothesis 3. Test 4. Revise 5. Retain
Positive Analysis
analysis of “what is”
Normative Analysis
analysis of “what ought to be”
Microeconomics
study of decisions of households and firms, how they interact and the influence of the government on their choices
Macroeconomics
study of economy as a whole (inflation, unemployment, economic growth)
Firm/Company/Business
an organization that produces a good or service
Entrepreneur
someone who operates a business
Innovation
practical application of of an invention
Technology
processes used to produce goods and services
Goods
tangible merchandise
Services
activities done for others
Revenue
total amount received for a good/service; price per unit x units sold
Profit
difference between cost and revenue, including opportunity cost
Household
all persons occupying a home
Factors of Production/Economics Resources/Inputs
used by firms for make goods/services (labor, capital, natural resources)
Capital
(physical) manufactured goods and services used to produce other goods and services
Human Capital
accumulated training and skills workers possess
