Chapter 1 Flashcards
Problem Solving and Decision Making
Scarcity
It is the limited nature of society’s resources.
Economics
It is the the study of how society manages its scarce resources.
Five How’s of Economics
- How people decide what to buy,
- How much to work, save, and spend,
- How firms decide how much to produce,
- How many workers to hire,
- How society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs.
Trade-Off
It is when an individual achieve a greater equality.
Efficiency
It is when a society gets the most from its scarce resources.
Equality
It is when prosperity is distributed uniformly among society’s members.
Opportunity Cost
It is any item that must be given up to obtain it.
Rational People
These people systematically and purposefully do the best they can to achieve their objectives.
Incentives
It is something that induces a person to act.
Market
It is a group of buyers and sellers. (Need not be in a single location)
Market Economy
It allocates resources through the decentralized decisions of many households and firms as they interact in markets.
“Organize Economic Activity” means determining
- What goods to produce?
- How to produce them?
- How much of each to produce?
- Who gets them?
Market Failure
It is when the market fails to allocate society’s resources efficiently.
Causes of Market Failure
- Externalities, when the production or consumption of a good affects bystanders (e.g. pollution).
- Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly).
Productivity
The most important determinant of living standards. It is the amount of goods and services produced per unit of labor. It depends on the equipment, skills, and technology available to workers.
Inflation
It is the increase in the general level of prices.
Causes of Inflation
Excessive growth in the quantity of money, which causes the value of money to fall. The faster the government creates money, the greater the inflation rate.
Two (2) Steps on Problem Solving
- Figure out what’s causing the problem.
- How to fix it.
Rational-Actor Paradigm
It is a model of behavior that assumes that people act rationally, optimally, and self-interestedly. It is used to analyze behavior and decision-making. It is only a tool for analyzing behavior, not advice on
how to live your life.
Incentives
It is created by rewarding good performance with. It must be aligned with the organizational goals.
By this we mean that employees have enough information to make good decisions and the incentive to do so.
- A way of measuring performance.
- A compensation scheme to reward good (or punish bad) performance.
A well-designed organization is one in which employee incentives are aligned with organizational goals. By this we mean that employees have:
- Enough information to make good decisions.
- The incentive to do so.
Three (3) Questions to Ask to Them
Q1: Who made the bad decision?
Q2: Does the decision maker have enough information to make a good decision?
Q3: Does the decision maker have the incentive to make a good decision?
Three (3) Solutions to Answer to Them
S1: Let someone else make the decision, someone with better information or incentives.
S2: Give the decision maker more information.
S3: Change the decision maker’s incentives.
It Requires Two (2) Steps
- Figure out why people are making mistakes.
- Figure out how to prevent future ones.
A Bad Decision Occurs Either of One (1) of the Two (2) Reasons:
- Decision makers do not have enough information to make a good decision.
- They lack incentives to do so.
Ethics & Economics
A debate is really a debate between value systems, it becomes much easier to understand opposing points of view, and to reach a compromise with your adversaries.
Deontologist
It judges actions as good or ethical by whether they conform to a set of principles, like the Ten Commandments.
Consequentialists
It judges actions by their consequences.
Economics Gives us Consequentialist
Understanding of the practice by comparing high prices to the implied
alternative. (If prices do not rise, the consequences would be excess demand)
