Chapter 1 Flashcards
Economics
the study of the choices that society makes given the scarce resources avilable
Choice
- What gets produced? What goods and services?
- How is it produced? What production techniques are used?
- Who gets what is produced? Distribution of goods and services throughout society
Scarcity
the notion that there are unlimited wants but resources are limited; How does society deal with that?
Why study economics?
- to understand society & economic decisions that are made influence society
- to learn a way of thinking
- to understand global affairs to better understand relationships between countries
- to be a more informed citizen
People are rational
we assume people make decisions using all available information
People respond to economic incentives
money talks; bank robbery example: take risk of getting robbed over hiring a body guard
Optimal decisions are made at the margin
- a marginal change refers to a small incremental change in the total; ie: marginal cost = small change in the total cost
- optimal decision making tells us that an activity will continue until marginal cost = marginal benefit
Sunkcosts
- costs that cannot be avoided b/c they have already been incurred; ie. desk clerk at a hotel still going to work regardless if a room gets rented
- sunkcosts are irrevelant to decision making
Opportunity Cost
- the next best alternative that we forgo when we make a decision; does not refer to the sum of all alternatives, just the next best alternative
- the total cost includes the implicit or opportuniy cost + the explicit cost (ie. cost to go to Saint Anselm College for 1 year)
Trade-offs
every decision that we make involves giving up something else b/c we face scarcity
Centrally Planned Economy
government makes all decisions; ie. North Korea; not very successful in producing low cost high quality goods which results in low standard of living
Market Economy
households and firms make decisions; not the government
Mixed Economy
households, firms and government all plays a role in decisions
Efficiency
society getting the most that it can from its scarce resources; markets are generally efficient b/c they tend to promote competition and voluntary exchange
Voluntary Exchange
the buyer and seller are both made better off by the transaction
Productive Efficiency
results when goods and services are produced at the lowest possible cost
Allocative Efficiency
production occurs in accordance with consumer preferences; the goods and services consumers want to buy
Equity
fair distribution of economic benefits; fairness (which is difficult to define & lies in the eye of the beholder) by promoting equity can reduce efficiency
Microeconomics
examines the functioning of the individual firm and individual decision making units
Macroeconomics
examines the functioning of the aggregates; the sum of everything; birds eye view
Positive Economics
Seeks to explain the behavior and function of systems without making judgments; describes what is and how it works (no judgments); fact
Normative Economics
seeks to analyze behavior; examines and prescribes what ought to be; does impart judgement; opinion; “we should”
Economic Models
simplified versions of reality; take away extra detail; 3 forms=words, equations, graphs
Economic Policy Objectives
efficiency, equity, growth and stability
Growth
increase in national output
Stability
National output grows steadily with resources operating in full employment
Ceteris Paribus
“all else being equal”
