Chapter 1 Flashcards
scarcity
occurs when there is not enough of our “wants” at a zero price. means we never have enough of everything, including time, to satisfy our every desire. unlimited wants exceed limited resources.
notes about scarcity
- the most basic concept of economics
- scarcity is a fact of life, was not invented by economists
- all goods & services are scarce
economics
the study of the choices people make to attain their goals, given their scarce recourses
think of economics as
- the study of how we deal with scarcity
- the study of how we make choices
with limited resources, people must make choices to satisfy their wants
people, firms, & governments must make these choices
scarcity forces us to make choices. what is important about choices?
with each choice we make, we give up some alternative
opportunity cost
the highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want or to engage in an activity
“next best alternative”
is not the same as “all possible alternatives”
what is the opportunity cost of coming to class?
- sleeping
- doing other work
(ranking based on preference)
opportunity cost of producing military goods
lost production on civilian goods
goal of an individual
constrained optimization problem:
- make ourselves as best off as possible
how do I spend my money?
3 assumptions about how people make choices
- people are rational
- people respond to economic incentives
- optimal decisions are made at the margin
being rational means
people try to gather info about a decision and make themselves better off
rationality does NOT mean we are perfect and error free
- may not have full info
- be short-sighted
- make math mistakes
- have logical or psychological biases
incentives
rewards or punishments for engaging in a particular activities
if designed correctly, incentives will
change the behavior of individuals to whom the incentive is offered
we strive to understand
- how people respond to incentives
- what types of incentives are created by economic policies
marginal =
additional or extra
MB
marginal benefit
MC
marginal cost
MB>MC
keep doing an activity because it will continue to make you better off
MB=MC
stop doing the activity because you “absorb” all possible net gains
MB<MC
never do an activity because you will continue to be worse off
empirical
data, numbers, quantitative predictions
models
simplified representations of the real world used as the basis for predictions or explanations
goal of a model
- traceable
- easy to understand
- explains & accurately predicts outcomes
economic models
need to be built on a series of assumptions
assumptions
the set of circumstances in which a model is applicable
“ceteris paribus” assumption
latin for “all other things equal”
goal: focus on what happens if we change a single variable
positive economics
written in a way that allows it to be proven true or false
normative economics
opinion based statement that cannot be proven true or false
microeconomics
the study of decision making undertaken by individuals
microeconomics individual
work overtime or not?
microeconomics family
public or private school?
microeconomics firm
should we lower prices?
macroeconomics
the study of the behavior of the economy as a whole
macroeconomics deals with
- the national unemployment rate
- interest rates
- the rate of inflation
- the national government budget deficit
- monetary & fiscal policy
more on macroeconomics
- deals with aggregates, or totals such as total output in an economy
- all the micro-decisions add up to become the macroeconomy
macro and micro concepts blend
cannot completely isolate one without the other
time series graph
important for viewing real-world data over time and find trends
