Chapter 1: Economic Foundations and Models Flashcards
Important ideas when considering economics
- People are rational
- people respond to incentives
- optimal decisions are made at the margin
Trade-offs
The idea that because of scarcity, producing more of one good or service means producing less of another good or service
Opportunity Cost
The highest-valued alternative that must be given up to engage in an activity
Central Planned Economy
An economy in which the government decides how economic resources will be allocated
Market Economy
An economy in which the decisions of households and firms interacting in markets allocate economic resources
Mixed Economy
An economy in which most economic decisions result form the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
Productive Efficiency
A situation in which a good or service is produced at lowest possible cost
Allocative Efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Equity
The fair distribution of economic benefits
What steps are followed when economists develop a model
- Decide on the assumptions to use in developing the model
- Formulate a testable hypothesis
- use economic data to test the hypothesis
- Revise the model if it fails to explain the economic data well
- Retain the revised model to help answer similar economic questions in the future
Economic Variable
Something measurable that can have different values
Positive Analysis
Analysis concerned with what is
- facts and logic
Normative Analysis
Analysis concerned with what ought to be
- Value judgements
Mircoeconomics
The study of
1. how individual economic agents make choices
2. how these choices come together to determine what happens in a single market
3. the impact of government interventions on market outcomes
Macroeconomics
The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
Production
The process of making goods and services
Entrepreneur
Someone who operates as a business
Innovation
The practical application of an invention
Invention
The development of a new good or a new process for making good
Technology
A firm’s technology is the process it uses to turn inputs into outputs
Firm, Company, or business
A firm is an organization that produces a good or service
Goods
Tangible items that people want
Services
Activities done for others
Revenue
All the money it receives when it sells goods or services
Profit
The difference between revenue and costs
Household
Consists of all the people occupying a home that make decisions together
Factors of production or economic resources
Things used to produce goods and services
- labor, capital, natural resources, entrepreneurial ability
Capital
Financial Capital
- Stocks and bonds issued by firms, bank accounts and holdings of money
Physical Capital (in economics capital refers to physical capital)
- Any manufactured goods that can be used to make other goods
Human Capital
the accumulated training, skills and knowledge that a person has
