Exam 1 Flashcards
Definition of Economics
The study of how individuals and society choose to use the scare resources that nature and previous generations have provided.
Three key concepts in economics
Opportunity cost
sunk cost and marginal cost
efficient market
Define Opportunity Cost
The best alternative that we give up when we make a choice or decision.
Define Sunk Cost
Costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred (represents the past).
Define Marginalism
The process of analyzing the additional or incremental cost or benefits arising from a choice or decision.
Define Efficient Market
Marhet in which profit opportunities are eliminated almost instaniously.
Economic Methodology
Economics theory (theoretical economics), descriptive economics, empirical economics, variables, theory, model, Ceteris Paribus.
Define Economics Theory
involves the interpretation of this data as well as the formation of hypotheses.
Define Descriptive Economics
involves gathering and compiling data about the economy. Descriptive economics occurs when economists make observations, notice patterns and record facts.
Define Empirical Economics
The collection and use of data to test economic theories.
Define Model
a formal statement theory, usually a statement of presumed relationship between 2 or more variables.
Define Ceteris Paribus
(all is equal) Device used to analyze the relationship between 2 variables while the values of other variables are held unchanged.
Two types of economic analysis
Normative economics and Positive economics
Define Normative Economics
An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe course of action.
Define Positive Economics
An approach to economics that seeks to understand behavior and the operation systems without judgement. It describes what exists and how it works.
Two Branches of Economics
Microeconomics and Macroeconomics
Define Microeconomics
The branch of economics that examines the functions of individual industries and the behavior of individual industries.
Define Macroeconomics
Examines the economic behavior of national production/output. Ex. GDP.
Four Criteria of Economics
Efficiency, Equity, Growth, and Stability
Define Efficiency
Refers to allocative efficiency. An efficient economy is one that produces what people want at the least possible cost.
Define Equity
Fairness. Weather its fair or not Doesn’t mean both sides are equal.
Define Growth
an increase in the total output of an economy.
Define Stability
a condition in which national output is growing steadily.
Three Fundamental Questions facing each economics
What gets produced? How it gets produced? Who gets what is produced?
Three fundamental inputs/resource/factors in production
Land, Labor, and Capital
One Graphical Tool
Production Possibility Frontiers (PPF)
Define PPF
is a curve or a boundary which shows the combinations of two or more goods and services that can be produced whilst using all of the available factor resources efficiently.
Three concepts illustrated in a PPF graph
Efficiency (production and economic efficiency), Opportunity Cost, and economic growth
Define Production Efficiency
An economic level at which the economy can no longer produce additional amounts of a good without lowering the production level of another product. This will happen when an economy is operating along its production possibility frontier.
Define Economic Efficiency
A broad term that implies an economic state in which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one person would harm another.
Two types of Economic Advantage
Absolute and Comparative Advantage
Define Absolute Advantage
A producer has a absolute advantage over another if he or she an produce that product using fewer resources, or if they can produce more with the same resources.
Define Comparative Advantage
Free trade benefits all trading partners because through voluntary cooperation and exchange, the whole can become greater the sum of its parts.
Two economic systems
Laissez Faire and Command Economics
Define Laissez Faire Economics
French term “allow them todo” economy in which individual people and firms pursue their won self-interest without any central direction or regulation.
Define Command Economics
An economy in which a central government either directly or indirectly sets output targets, income and price.
Two characteristics of a Laissez Faire economy
Consumer Sovereignty and Free enterprise
Define Consumer Sovereignty
Idea that consumers ultimately dictate what will be produced (or not) by choosing what to produce (or not to).
Define Free Enterprise
Freedom of individuals to state and operate private businesses in search of profit.
Define Production
Process of transporting goods and services
Define inputs
Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants Land Labor Capital.
Define outputs
Goods and services value to a household.
Define Capital Goods
Things that are produced and then used in the production of other goods and services.
Define Choice
Is an act of choosing between two or more possibilities.
Define Fallacy of Composition
The belief hat what is true for a part is not necessarily true for the whole.
Define Post Hos Fallacy
Literally, “after this in time, therefore be this”. A common error made made in thinking about causation. If event A happens before event B, it is not necessarily true A caused B to happen.
Define consumer goods
goods bought and used by consumers, rather than by manufacturers for producing other goods.
Define Investment
The process of using resources to produce new capital.
