Chapter 1 Flashcards
What is scarcity?
The idea that resources are limited.
Define Economics
Study of the choices made when there is scarcity
What are the 5 factors of production (or inputs/resources)?
- Natural resources: those provided by nature such as land, minerals, etc.
- Labor: physical or mental effort people use to produce goods and services.
- Physical capital: equipment, machines, structures, infrastructure—things used to produce goods and services.
- Human capital: knowledge and skills acquired by a worker through education and experience.
- Entrepreneurship: effort used to coordinate the factors of production to produce and sell shit.
What unites all choices people make, regardless of in what context they’re made?
Scarcity/limited resources
What is the difference between positive and normative analysis?
• Positive analysis answers “what is,” while normative analysis answers “what ought to be”
What is most of economics based on, positive or normative analysis?
Positive.
What are the 3 key economic questions?
- What products do we produce?
- How do we produce the products?
- Who consumes the products?
What is an economic model?
A simplified representation of an economic environment, with all of the essential features of the environment eliminated; an abstraction from reality, often employing a graph.
What would be an economist’s solution for congestion?
Imposition of a congestion tax, which would simply be a toll on rush-hour commuters. This would effectively balance out the cost that congestion puts onto the time lost sitting in traffic, which has a negative impact on the efficiency of the economy.
What are things a country can do to spur economic growth?
- Expand production facilities (i.e. increase capital).
- Improve public infrastructure like highways and water systems.
- Widen educational opportunities.
- Adopt new technology
Recent research by economists has shown that what and what play key roles in economic growth?
- The legal system:
- The regulatory environment: institutions that impede entrepreneurship simultaneously impede economic growth by making investment and risk-taking more difficult.
What is the economic view of the Great Recession?
The financial crisis and its causes are pretty easy to dissect: homeowners couldn’t pay their mortgage payments; businesses then found it difficult to borrow money; economic activity as a whole began to contract.
What are the 4 elements core to economic thinking?
- Use of unrealistic and overly simplistic assumptions to focus attention to the details that really matter.
- Ceteris paribus, a Latin expression meaning that other variables are held fixed, which means that variables have to be considered in isolation: how does one variable affect another, with all others held fixed?
- Thinking at the margin: change one unit of one variable and see its effects.
- That rational people work in their own self interests and respond to incentives.
What did Adam Smith say that’s important for an economic way of thinking?
- Basically a rational person is a tool that means it is assumed that people act “rationally” or in their own interest.
- Adam Smith generally said that self interest or the rational model tends to outweigh the kindness and altruism that, as he said, does exist in human beings; as a result, economists generally take the assumption and willing oversimplification that people will act rationally.
Explain how the economic ways of thinking relate to the issue of solving traffic congestion with a congestion tax.
- Simplification: in this model, every car has the same effect on the travel time of other cars.
- Ceteris paribus: focus attention to variable 1, which is congestion tax, and how it related to variable 2, number of cars using the highway. This way, possible other influenced on the number of cars using the highway, such as gas prices, would remain fixed.
- Think at the margin: determine the cost that one driver imposes on the entirety of commuters in terms of additional time in transit, translate that additional cost to the terms of time spent vs. fiscal cost, and then set the congestion tax to pay off whatever that additional cost is for overfilling the highway.
