Chapter 1 - Economics: Foundations and Models Flashcards
Market
A group of buyers and sellers of a good or service and the institutions or arrangements by which they come together to trade.
Marginal Analysis
Analysis that involves comparing marginal benefits and marginal costs.
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants.
Economics
The study of the choices people make to attain their goals, given their scarce resources.
Economic model
A simplified version of reality used to analyze real-world economic situations.
What are the 3 key economic ideas?
- People are rational
- People respond to incentives
- Optimal decisions are made at the margin
Trade-off
The idea that because of scarcity, producing more of one good or service means producing less of another.
Voluntary exchange
A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.
Centrally 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 allocates economic resources.
Mixed economy
An economy in which most economic decisions result from 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 the lowest possible cost.
Opportunity cost
The highest-valued alternative that must be given up to engage in an activity.
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 are the 3 key economic questions?
- What goods and services will be produced?
- How will the goods and services be produced?
- Who will receive the goods and services produced?
Libertarian equity
Everybody gets the same opportunity
Egalitarian equity
Everybody gets the same outcome
Economic variable
Something measurable that can have different values.
Positive analysis
Analysis concerned with what is
Normative analysis
Analysis concerned with what ought to be.
What are the 5 steps to develop an economic model?
- Decide on the assumptions that simplify the model
- Formulate a testable hypothesis
- Use economic data to test hypothesis
- Revise model until it explains data well
- Retain for future use
Microeconomics
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Macroeconomics
The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
