Chapter 1 - Economics and Life Flashcards
What is economics?
The study of how people manage resources.
What is Rational Behaviour?
How to behave in the way that will best achieve their goals
- decision-making process that is based on making choices that result in the optimal level of benefit or utility for an individual.
eg. To study or relax?
To buy pasta or salad?
What is scarcity?
the condition of peoples’ wants being greater than available resources.
- people are constrained by limited resources
eg. weekly allowance, water and air quality
What is opportunity cost?
equal to the value of what you have to give up in order to get something.
- involves weighing the trade-off between costs and benefits
- includes the value of the next best alternative.
What is direct cost?
Includes all associated costs
What is marginal decision making?
people compare the additional benefits of a choice against the additional costs.
What are sunk costs?
costs that you have payed and cannot get back ever !
What is an incentive? What is a positive vs negative incentive?
An incentive is something that causes a change in the tradeoffs that people face.
Positive = makes people more likely to do something by lowering their opportunity cost. Negative = Makes people less likely to do something by raising their opportunity cost
What is efficiency?
Resources are used to produce goods and services with the greatest economic value.
- increasing efficiency means finding a way to better use resources to produce the things people want
When do economies not operate efficiently?
Innovation: yet to be discovered innovations/ ideas increase efficiency
Market failure: people and firms may be prevented from capturing the benefits of the opportunity or incur additional costs
Intervention: interventions in the economy cause transactions to not take place (eg. government policies)
Goals other than profit: individuals and governments have goals other than profit.
What is correlation? (negative and positive)
A consistently-observed relationship between two events.
Positive = increase in A and B
Negative = Increase in A and a decrease in B
What is causation?
A relationship between two events in which one brings about the other
- A causes B
What is correlation without causation?
Two events may be extremely correlated, making it appear that a causal relationship exists.
What are omitted variables?
Two events may be extremely correlated due to a third event causing the two.
What is reverse causation?
Sometimes it is unclear whether Event A causes Event B or if Event B causes Event A.
