Chapter 1-5 Flashcards
economics
the study of the allocation of our limited resources to satisfy our unlimited wants
resources
inputs used to produce goods and services
the economic problem
Scarcity forces us to choose, and choices are costly because we must give up other opportunities that we value
macroeconomics
the study of the aggregate economy, including the topics of inflation, unemployment, and economic growth
aggregate
the total amount—such as the aggregate level of output
microeconomics
the study of the smaller units within the economy, including the topics of household and firm behaviour and how they interact in the marketplace
theory
an established explanation that accounts for known facts or phenomena
hypothesis
a testable proposition
empirical analysis
the examination of data to see if the hypothesis fits well with the facts
ceteris paribus
holding everything else constant
correlation
two events that usually occur together
causation
when one event causes another event to occur
fallacy of composition
Even if something is true for an individual, it is not necessarily true for a group.
positive analysis
an objective, value-free approach, utilizing the scientific method
normative analysis
a subjective, biased approach
scarcity
the situation that exists when human wants exceed available resources
labour
the physical and mental effort used by people in the production of goods and services
land
the natural resources used in the production of goods and services
capital
the equipment and structures used to produce goods and services
human capital
the productive knowledge and skill people receive from education and on-the-job training
entrepreneurship
the process of combining labour, land, and capital together to produce goods and services
goods
items we value or desire
services
intangible acts that people want
bads
items that we do not desire or want
opportunity cost
the highest or best forgone opportunity resulting from a decision
marginal thinking
focusing on the additional, or incremental, choices
rule of rational thinking
Individuals will pursue an activity if the expected states that individuals will pursue an activity if they expect the marginal benefits to be greater than the marginal costs, or E(MB)>E(MC)
net benefits
the difference between the expected marginal benefits and expected marginal costs
positive incentives
incentives that either reduce costs or increase benefits, resulting in an increase in the activity or behaviour
negative incentives
incentives that either increase costs or reduce benefits, resulting in a decrease in the activity or behaviour
specializing
concentrating on the production of one, or a few, goods or services, allows them to make the best use of their limited resources.
comparative advantage
occurs when a person or a country can produce a good or service at a lower opportunity cost than others can
consumer sovereignty
consumers vote on economic affairs with their dollars in a market economy
command economy
The government uses central planning to coordinate most economic activities.
market economy
Goods and services are allocated based on the private decisions of consumers, input suppliers, and firms.
mixed economy
Government and the private sector together determine the allocation of resources.
labour-intensive
production that uses a large amount of labour
capital-intensive
production that uses a large amount of capital
economic theories
statements used to explain and predict patterns of human behaviour, that through abstractions, provide a broad view of human economic behaviour.
why are observations and predictions more difficult in the social sciences
With its focus on human behaviour, which is more variable and less predictable, observation and prediction are more difficult in the social sciences.
why are “free lunches” not free
Because the production of any good uses up some of society’s resources, there is no such thing as a free lunch.
how specialization and trade lead to greater wealth and prosperity
Specialization and trade increase wealth by allowing a person, a region, or a nation to specialize in those products that it produces at a lower opportunity cost and to trade for those products that others produce at a lower opportunity cost.
3 questions every society faces
- what to produce
- how are the goods and services produced
- who will get the goods and services
what to produce
In a decentralized market economy, millions of buyers and sellers determine what and how much to produce. In a mixed economy, the government and the private sector determine the allocation of resources.
how to produce
The best form of production is the one that conserves the relatively scarce (more costly) resources and uses more of the abundant (less costly) resources. When capital is relatively scarce and labour is plentiful, production tends to be labour-intensive. When capital is relatively abundant and labour is relatively scarce, production tends to be capital-intensive.
who will get the goods and services
In a market economy, the amount of goods and services one is able to obtain depends on one’s income. The amount of one’s income depends on the quantity and the quality of the scarce resources that the individual controls.
