Chapter 1 Flashcards
Economics
the study of how people, individually and collectively, manage resources
Microeconomics
the study of how individuals and firms handle resources
Macroeconomics
the study of the economy on a regional, national, or international scale
Rational Behavior
making choices to achieve goals in the most effective way possible
How Economists Break Down Problems (4 Questions)
- What are the wants and constraints of those involved?
- What are the trad-offs
- How will others respond?
- Why isn’t everyone doing it already?
Scarcity
the condition of wanting more than we can get with available resources
Opportunity Cost
the value of what you had to give up in order to get something; the value of your next-best alternative - the “opportunity” you have to pass up in order to take your first choice.
Marginal decision making
comparison of additional benefits of a choice against the additional costs, without considering related benefits and costs of past choices
Sunk Costs
costs that have already been incurred and cannot be recovered or refunded; (should not have bearing on marginal decision, but usually do psychologically)
Incentive
something that causes people to behave in a certain way by changing the trade-offs they face;
“Positive Incentive” (Incentive) - makes people more likely to do something
“Negative Incentive” (Disincentive) - makes people less likely to do something
Trade-offs: Two Assumptions Economists Make
- People respond to incentives
2. Nothing occurs in a vacuum - there will always be a reaction to every action
Collateral
a possession pledged by a borrower to a lender; ex: a house, a car, etc.
Efficiency
use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society
Abnormal Economic Circumstances (Causing Inefficiency)
- Innovation - “too new”; did not exist to take advantage of
- Market Failure - no market for product or service due to a variety of circumstances, e.g., lack of collateral
- Intervention - intentional or unintentional via gov’t or powerful source
- Goals other than profit - social justice, art, etc.
Normative Analysis
how one wants the world to look, or should work
Positive Analysis
how the world actually works
Correlation
a consistently observed relationship between two events or variables
“Positively Correlated” (Directly) - occur at the same time or move in the same direction
“Negatively Correlated” (Inversely) - one event or variable increases, while a related event or variable decreases; move in opposite directions
“Uncorrelated” - NO relationship
Causation
a relationship between two events in which one brings about the other
Three Ways Correlation and Causation Can Be Confused
- Correlation without causation
- Omitted variables
- Reverse causation
Reverse Causation
did A cause B, or did B cause A?
Ex: Rain (A) causes raincoats (B); OR
Raincoats (B) cause rain (A)
Model
simplified representation of a complicated situation; (economics) show how people, firms, and governments make decisions about managing resources, and how their decisions interact
Circular Flow Model
an economic model; simplified representations of how the economy’s transactions work together
Actors:
1. Households - supply land and labor to firms (land, labor, capital = factors of production); buy goods and services produced by firms
2. Firms - buy or rent land, labor, capital; produce and sell goods and services
Factors of Production
land, labor, and capital (found in households)
Market for Goods and Services
all activity involved in the buying and selling of goods and services; households spend wages from labor and income from land and capital, and firms earn revenue from selling their goods and services
Market for Factors of Production
households supply land, labor, and capital, and firms hire and purchase or rent these inputs
Three Things A Model Should Do
- Predict cause and effect
- Make clear assumptions
- Describe the real world accurately
Positive Statement
a statement that makes a claim about how the world actually works
Normative Statement
a statement that makes a claim about how the world should be
