Chapter 1: The Art and Science of Economic Analysis Flashcards
Economics
the study of how people use their scarce resources to satisfy their unlimited wants
Resources
the inputs, or factors of production, used to produce the goods and services that people want; consists of labor, capital, natural resources, and entrepreneurial ability
Labor
the physical and mental effort used to produce goods and services
capital
the buildings, equipment, and human skills used to produce goods and services
Physical capital
factories, tools, machines, computers, buildings, airports, highways, and other human creations used to produce goods and services
Human capital
consists on knowledge and skill people acquire to increase their productivity
Natural resources
all gifts of nature used to produce goods and services; includes renewable and exhaustible resources
Renewable resource
draw on indefinitely if used conservatively
Exhaustible resource
does not renew itself and so available in limited amounts
Entrepreneurial ability
the imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss
Entrepreneur
a profit seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation
Wages
payment to resource owners for their labor
Interest
pavement to the resources owner for the use of their capital
Rent
Payment to resources owners for the use of their natural resources
Profit
reward for entrepreneurial ability; sales revenue minus resource cost
Good
a tangible product used to satisfy human wants
Service
an activity, or intangible product, used to satisfy human wants
desire exceeds the amount available at a zero price
A good or service is scarce if the amount people _______
Bads
Things we want none of even at zero price
Scarcity
Occurs when the amount people desire exceeds the amount available at a zero price
Air and sea water
A few goods seem free because the amount available at a zero price exceed the amount people want, for example:
Without scarcity, there would be no economic problem and no need for prices
Goods and services that are truly free are not the subject economics.
Consumer
Demand the goods and services produces
Resources owners
Supply resources to firms, government, and the rest of the world
Markets
a set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms
Product market
a market in which a good or service is bought and sold
Resource market
a market in which a resources are bought and sold
circular-flow model
a diagram that traces the flow of resources, products, income, and revenue among economic decision makers
Rational self-interest
each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit
Self-interest
does not rule out concern for others, but it means that concern is influenced by the same economic forces that affect other economic choices
Marginal
incremental, additional, or extra; used to describe a change in an economic variable
exceeds the expected marginal cost
A rational decision maker changes the status quo if the expected marginal benefit from the change
Microeconomics
the study of the economic behavior in particular markets, such as that for computers or unskilled labor
- Individual economic choices
- Markets coordinate the choices of economic decision makers
- Individual pieces of the puzzle
Macroeconomics
the study of the economic behavior of entire economies, as measured, for example, by total production and employment
-Performance of the economy as a whole
Recession
decline in economic activity as reflected by a decline in production, employment, or other aggregate measures
Economic fluctuations
the rise and fall of economic activity relative to the lantern growth trend of the economy, also called business cycles
Economic theory/economic model
a simplification of reality used to make predictions about cause and effect in the real world
The Scientific Method
Identify the question and define relevant variables
Specify assumptions
Formulate a hypothesis
Test the hypothesis
Variable
a measure, such as price or quantity that can take on different value is at different times
Other-things-constant assumption
the assumption, when focusing on thee relation among key economic variables, that other variables remain unchanged, ceteris paribus
Behavioral assumptions
an assumption that describes the expected behavior of economic decision makers-what motivates them
Positive economic statement
a statement that can be proved or disproved by reference to facts
Normative economic statement
a statement that reflects an opinion which cannot be proved or disproved by reference to the facts
offset one another so the average behavior of a large group can be predicted more accurately than the behavior of a particular individual
The random actions of individuals tend to
Association-is-causation fallacy
the incorrect idea that if two variables are associated in time, one must necessarily cause the other
Fallacy of composition
the incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole
Secondary effects
unintended consequences of economic actions that may develop slowly over time as people react to events
