Chapter 1: Thinking like an Economist Flashcards
economics
study of choices people make based on the scarcity of resources
scarcity
unlimited wants exceed limited resources to fulfill those wants
diamond-water paradox
diamonds are scare, so they have greater value. water is abundant, so it is less valuable.
market
group of buyers and sellers (utc, offerup, etsy, etc.)
invisible hand theory
individuals’ pursuit will guide firms to produce that best meets consumers’ needs
equilibrium
the invisible hand will guide the market to the “optimal” price
cost-benefit principle
action taken only if the benefits are as great as the costs
opportunity cost
highest value alternative given up in order to engage in some activity (explicit+implicit cost)
explicit cost
financial cost of a transaction
implicit costs
value of best forgone use of a resource
sunk cost
costs that are irrecoverable at the time the decision is made, should not be considered when making a decision
economic surplus
the total benefit consumers and producers receive from a market transaction
*if economic surplus is positive, then pursuing the given activity will make you better off
marginal
additional or incremental
marginal analysis
conducting a cost benefit analysis, comparing the additional cost of an incremental action to the additional benefit of an incremental action
marginal cost (MC)
additional cost incurred by taking an incremental action
marginal benefit (MB)
the additional benefit realized by taking an incremental action
incentive
benefit derived from taking an action
model
simplified version of reality that enables one to identify a relationship
-economists build models to test hypotheses regarding human behavior
hypothesis
an if, then statement that can be tested
correlation
a statistical relationship between 2 variables
causation
one variable has a measurable impact on another variable
positive analysis
analysis concerned with what is
-when the price of Coachella tickets decrease, more tickets will be sold
normative analysis
analysis concerned with what ought to be
-the state of California should offer a free college education to all residents
cost-benefit principle
an action should be taken if, and only if, its benefits exceed its cost
use IOU
when Inputs are given
put the Other good (the good you are not finding the OC of)
Underneath in your fraction
economic growth
an increase in an economy’s ability to produce good and services, shift ppf outwards
economic decline
a contraction in an economy’s ability to produce goods and services, ppf shift inwards 1
