Chapter 1 - Economic Decisions Flashcards
Economics
Discipline that studies how efficient decisions are made
Efficient Decisions
Involve choosing the most valuable alternative
Theory of Revealed Preference
Our choices reveal our values
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
Cost
The value of the best alternative which is sacrificed when a decision is made
Costs may or may not involve spending money
No Free Lunch Principle
Since any decision has at least two alternatives, choosing an alternative means that one must sacrifice at least one other alternative. That is, 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 of Something
The value of the individual units of that something
Marginal Analysis
We consume each unit for which the marginal value is at least
as great as marginal cost
True Shape of Marginal Costs II - The Producer
**ADD MORE*
So as production increases, marginal cost rises
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
**ADD MORE **
The relationship between the possible prices of something and the quantities people are willing to buy, all things being equal
Supply
ADD MORE
The relationship between the possible prices of something and the quantities that people or firms
are willing and able to sell, other things equal
Social Gain
= Total Value - Total Cost
Consumer’s Gain
= Total Value - Total Amount Paid
Producer’s Gain
= Total Amount Paid - Total Cost
Overall Well-being
ADD MORE
Interacting markets solve the economic problem - allocating scarce resources to their best uses
Changes in Supply
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
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 influence the consumer’s willingness to purchase the product which have nothing to do the product price
