Chapter 1 Flashcards
Incentives
rewards or penalties for engaging in a particular activity
Economics
the study of how people allocate their limited resources to satisfy their unlimited wants
in short, the study of how people make choices
Resources
things used to produce goods and services to satisfy people’s wants
Wants
what people would buy if their incomes were unlimited
The purpose of economics is to…
…explain choices.
Two types of analyses in economics:
Microeconomics & Macroeconomics
Microeconomics
study of decision-making undertaken by individuals (or households) and firms
ex: change in price of gas, or effect of new taxes on a specific industry
Macroeconomics
study of behavior of the economy as a whole
includes such economywide phenomena as changes in unemployment, general price level, and national income
Aggregates
total amounts/quantites
Aggregate Demand
total planned expenditures throughout a nation
Connection between Micro and Macro:
Micro decisions result in aggregates, which is the focus of Macro
Economic System
a society’s institutional mechanism for determining the way in which scarce resources are used to satisfy human desires
Three questions that must be addressed by every nation:
- What and how much will be produced?
- How will items be produced?
- For whom will the items be produced?
Econ System:
Centralized Command and Control (Central Planning)
An entity (king, dictator, central govt, etc) decides answers to the three questions.
Ex: govt may decide that a certain type of car should be produced at a certain amount; they’d issue rules of the production; then they’d decide who is authorized to purchase the cars
Econ System:
The Price System (Market System)
Decentralized decision-making; individuals and families own all of the scarce resources used in production. These private parties decide answers to the three questions.
Ex: individuals decide what cars to produce and how many; they decide how to produce these cars; other individuals decide how much of their earnings they wish to spend on these cars
Mixed Economic Systems
most econ systems of the world’s nations are mixed - incorporates both Centralized Planning and Market System
always leans toward one side or the other, but incorporates elements of both
Does self-interest just pertain to increasing one’s wealth?
No, it also includes goals relating to prestige, friendship, power, helping, art, and other matters.
Models, or Theories
simplified representations of the real world, used as the basis for predictions or explanations
Ideas of Models and Realism
- no model in any science captures every detail or relationship that exists
- models are abstractions from reality
- models should only capture the essential relationships sufficient to analyze our particular problem/question
Ceteris Paribus Assumption
kay-ter-us pear-uh-bus
assumption that nothing changes, except for the factor(s) being studied
we know certain factors influence decisions about making purchases, however we hold them constant when looking at relationship between changes in price and how much of a product will be purchased
Empirical
relying on real-world data in evaluating the usefulness of a model
Economic models don’t relate to the way people…
They relate to the way people…
think; act
Behavioral Economics
an approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision-making
Proponents of behavioral econ. suggest that traditional econ. models assume people exhibit three “unrealistic” characteristics:
- Unbounded selfishness (people are only interested in their own satisfaction)
- Unbounded willpower (choices are always consistent with their long-term goals)
- Unbounded rationality (they are able to consider every relevant choice)
Bounded Reality
hypothesis that people are nearly, but not fully, rational.
because of this, they cannot examine every possible choice available to them, but instead use simple rules of thumb to sort among the alternatives that happen to occur to them
Rules of Thumb
bounded reality
- because every possibility cannot be considered, an individual will tend to fall back on the simpler methods of decision-making, rather than trying to sort through all possibilities
- a person will continue to rely on rule of thumb, even if there is a major change in their environment; however, economists have found that people respond to altered circumstances by fundamentally changing behaviors
- people will generally make decisions consistent with their own self-interest and long-term objectives
Positive Analysis
a “what is” statement
also - value-free approach to inquiry! no subjective or moral judgments enter into this analysis.
Positive Economics
“WHAT IS”
analysis strictly limited to making either purely descriptive statements or scientific predictions
Normative Economics
“WHAT OUGHT TO BE”
analysis involving value judgments about economic policies; related to whether outcomes are good or bad
- a result of interjecting our values into the anaylsis
Relationship between positive and normative economics:
“If price of gas rises, people will buy less”
(positive)
Adding “…so we should not allow the price to go up”
(normative)
Reason: we’ve added a value judgement; anytime the word “should” is involved, it is NORMATIVE!
Rationality Assumption
the assumption that people do not intentionally make decisions that would leave them worse off
