Chapter 2 Flashcards
Economics
The study of how individuals, firms, and society make decisions to allocate limited resources to many competing wants.
Scarcity
Too many wants, too little resources for these wants
- people must make choices given the resource limitations they face
Incentives
The factors that motivate individuals and firms to make decisions in their best interest
- economists begin most questions by considering how rational people would respond to the incentives that specific situation provide
Microeconomics
The study of the decision making by individuals, businesses, and industries.
-mIcroeconomics- “i” for individual (person/firm)
Macroeconomics
This study of the broader issues in the economy such as inflation, unemployment, and national output of goods and services.
-mAcroeconomics- “a” stands for aggregate (cities/nations)
Ceteris paribus
Assumption used in economics that other relevant factors/variables are held constant.
- “All other things equal”
Model Building
Models are created and then tested
Efficiency
Deals with how well resources are used and allocated
Production efficiency
When goods are produced at the lowest cost
Allocative Efficiency
When individuals who desire a product the most obtain those goods and services
Pareto efficiency
Occurs when society improves the well-being of as many individuals as possible without making anyone worse off
Equity
The fairness of various issues and policies
Positive qustions
A question that can be answered using available information or facts
Normative Questions
A question whose answer is based on societal beliefs on what should or shouldn’t take place
- difficult to resolve this a differing opinions
Key Principles of Economics
8 principles
Principle of Economics 1
Economics is concerned with making choices with limited resources
-making decisions on allocating limited resources to maximize an individual or society’s well-being
Principle of Economics 2
When making decisions one must take into account trade-offs and opportunity costs
Trade-off
Have to decide between alternatives, which always exists whenever we make a decision
Opportunity cost
The value of the next best alternative
- when you give up something for something else
Principle of Economics 3
Specialization lead to gains for all involved
- as long as exchange is possible and those involved, trade in manually beneficial manner
Specialization
Specialization in task in which one is more proficient
- can lead to gains for all parties as long as exchange is possible and those involved, trade in manually beneficial manner 
Principle of Economics 4
People respond to incentives, both good and bad
- but, not everyone follow each incentive every time
Incentive
Stimulation
Principle of Economics 5
Rational behavior requires thinking on the margin
Marginal benefit
What benefit you get, after paying the extra cost for something
Ex. The enjoyment you receive from the dessert
Marginal Cost
Cost that you pay fro something
- ex. Extra cost of buying desert
Thinking on the Margin
Considering whether marginal benefit worth the marginal cost
- wether benefits worth the extra costs
Principle of Economics 6
Markets are generally efficient, when they aren’t, government can sometimes correct the failure
Competition
Forces firms to provide products at the lowest possible price, or some other firm will undercut their high price
Market is
Dynamic
Prices and Profits
Drives and disciplines markets
Invisible hand
Phenomenon that markets promote efficiency through the incentives faced by individuals and firms
Principle of Economics 7
Economic growth, low unemployment, and low inflation — are economic goals that do not always coincide.
Principle of Economics 8
Institutions and human creativity help explain the wealth of nations
