Chapter 1: Economic Decisions Flashcards
Economics
is the discipline that studies how efficient decisions are made
Efficient decisions
involve choosing the most valuable alternative
theory of revealed preference
Based on the choices of a consumer a resulting choice reveals preference.
characteristics of value
- Value depends on the situation
- Value is different for different people
- Subsequent units of the same good have less value
optimal arrangement principle
The idea that we first choose the best, then the second best, and so on.
value of something to an individual
the most that individual is willing to sacrifice to obtain that something. Or, if the individual owns that something, its value is the least the individual is willing to accept in exchange for that something.
Cost
the value of the best alternative which is sacrificed when a decision is made.
no free lunch principle
Since any decision has at least two alternatives, any decision involves costs.
Macroeconomics
the study of entire economies, using concepts like total output, the unemployment rate, the national debt, total investment.
scarcity
Having more wants than our resources can satisfy.
Marginal Value
the value of the individual units of something in a group. In other words how much value is given to an item as more and more is consumed.
marginal analysis
We consume each unit for which the marginal value is at least as great as marginal cost.
Law of Diminishing Returns
As we add workers to a production facility, eventually they become less productive because there’s no way for everyone to take part in the production process.
Demand
is the relationship between the possible prices of something and the quantities people are willing to buy, other things equal (same as marginal value curve)
Supply
is the relationship between the possible prices of something and the quantities people/firms are willing and able to sell, other things equal (same as marginal cost concept)
equilibrium price
consumers can buy all they want and, at the same time, firms can sell all they want.
Social Gain =
Total Value - Total Cost or Marginal Value - Marginal Cost
Consumer’s Gain =
Total Value - Total Amount Paid
Producer’s Gain =
Total Amount Paid - Total Cost
The Economic Problem
allocating scarce resources to their best uses
Changes in supply
are shifts in the supply curve. That is, producers wish to produce more or less, even if the price does not change. They are caused by changes in the producer’s costs.
Changes in demand
are shifts in the demand curve. That is, consumers wish to buy more or less, even if the price does not change. They are caused by changes in things that influences the consumer’s willingness to purchase the product which have nothing to do the product price.
