Chapter 1: The Scope + Method of Economics

Question 1

what is economics?

Answer 1

the study of choices that people, firms + societies make with their limited resources

Question 2

microeconomics (this course)

Answer 2

firm decisions, how firms compete, individual decision making, how groups of consumers make decisions, individual markets

Question 3

macroeconomics (econ 104)

Answer 3

how government decisions impact whole

Question 4

scarcity

Answer 4

a good is scarce if it has limited availability

Question 5

water, cars, diamonds, Beyonce

Answer 5

these are all scarce

Question 6

5 foundations of economics

Answer 6

1. incentives
2. life is about tradeoffs
3. opportunity cost
4. marginal thinking
5. trade

Question 7

incentives

Answer 7

people are motivated by positive + negative incentives
ex: grades (if someone has a good grade, they’re motivated more to keep up good work)

Question 8

life is about tradeoffs

Answer 8

example: 1 heavy duty bomber is the equivalent of
- a modern school in 30 cities
- 50 miles of highways
- 2 hospitals

Question 9

opportunity cost

Answer 9

highest valued alternative that must be given up to engage in an activity

Question 10

examples of opportunity cost 1

Answer 10

woman waited 3 weeks in line to save $300 on tv at best buy. what would the opportunity cost be?
it would be the 3 weeks she spent waiting in line where she could be doing something else

Question 11

marginal thinking

Answer 11

evaluated whether the benefit of acquiring one more unit of something is greater than its cost
ex: purchasing a textbook, couponing

Question 11

examples of opportunity cost 2

Answer 11

what is the opportunity cost of going to school?
working a job, other things that are the next best use of your time + money

Question 12

trade

Answer 12

trade, specialization, + comparative advantage are cornerstones of economics

Question 13

ceteris paribus

Answer 13

holding all things constant. we judge models based on how well they work in real life
ex: if the price of milk increases, people will buy less milk

Question 14

endogenous

Answer 14

a factor is endogenous if it is controlled for in the model (a variable with a model)

Question 15

exogenous

Answer 15

a factor outside the model is exogenous (a variable like price, quantity, people inside a store, outside the model)

Question 16

beware of faulty assumptions with ceteris paribus

Answer 16

2007 financial crisis happened because banks assumes real estate prices always rise, when from 2006-2007 prices fell
ex: paper airplanes

Question 17

positive statement

Answer 17

statement that is testable- verifiable

Question 18

normative statement

Answer 18

cannot be tested or verified

Question 19

experimental economics

Answer 19

takes models + tests them directly by providing monetary incentives to subjects

Question 20

economists build test models using the scientific method:

Answer 20

1. observe phenomenon
2. based on observations, researchers develop a hypothesis (a proposed explanation for that phenomenon
3. construct a model to test hypothesis
4. design experiments to test how well the model works. After collecting data, scientists can verify, revise, or refuse the hypothesis

Question 21

how do economists verify, revise, or refuse the hypothesis?

Answer 21

data gathering/ real world events are important for testing economic theory