Chapter 1 Flashcards
What is normative economics?
This is the study of what certain scenarios should be/ have been. This is subjective and not based on facts.
What is positive economics?
This type of economics is an analysis of the past and present, to make justified predictions for the future. This is objective and is based on facts.
Macro-Economics Definition
The study of the performance of national economics and the policies that governments use to try to improve that performance.
Micro-Economics Definition
The study of individual choices under conditions of scarcity, and its implications for society. Decision makers are assumed to be rational at all times.
Scarcity definition
The resources available to satisfy the demand are limited to acquire.
I.E. Having more of one thing means having less of another.
Economic surplus
The benefit of taking action, minus the cost of that action.
Benefit- The value of making the decision.
Cost- Monetary or opportunity cost.
Rationality definition
Is that an individual takes action if the extra benefits of taking that action are at least as great as the extra costs.
4 important decision pitfalls
- People tend to measure costs and benefits as proportions rather than absolute money amounts.
- Ignoring opportunity costs.
- Failure to ignore sunk costs.
- Failure to understand the distinction between average and marginal —> The focus should always be on the benefit and cost of an additional unit of activity.
Sunk costs definition
Costs that are beyond recovery at the moment a decision must be made.
Marginal benefit definition
Marginal benefit- the increase in benefit that results from carrying out one additional unit of an activity.
Average benefit definition
Average benefit- the total benefit of undertaking n units of an activity divided by n.
Marginal Cost
Marginal cost- the increase in total cost that results from carrying out one additional unit of an activity.
Average cost
Average cost- the total cost of undertaking n units of an activity divided by n.
