Intro - Chptr 1 Flashcards
Define: Economics
The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.
“Coordination” of individuals’ wants & desires in the field of economics refers to three central problems:
(1) What, and how much, to produce
(2) How to produce it
(3) For whom to produce it
Scarcity (Define)
Two elements of scarcities?
The goods available are too few to satisfy individuals’ desires.
Two elements: (1) our wants & (2) our means of fulfilling those wants.
Coordination of wants & desires in all known economies involves some type of coercion, e.g.
(1) Limiting people’s wants
(2) Increasing the amount of work individuals are willing to do to fulfill those wants
Economic reasoning is making decisions on the basis of:
Assessing the cost & benefits of a decision.
Marginal cost
The additional cost to you over and above the costs you have already incurred.
Marginal benefit
The additional benefit above what you’ve already derived.
Sunk cost
Costs that have already been incurred and cannot be recovered.
Economic decision rule:
If the marginal benefits of doing something exceed the marginal costs, do it.
If the marginal costs of doing something exceed the marginal benefits, don’t do it.
Opportunity cost
The benefit forgone by undertaking an activity; the value of the next-best alternative to the alternative selected
Economic reality is controlled by three forces:
(1) Economic forces (necessary reactions to scarcity)
(2) Social and cultural forces
(3) Political and legal forces
Market force
An economic force that is given relatively free rein by society to work through the market.
Examples of early classical economists:
Adam Smith, Thomas Malthus, John Stuart Mill, David Ricardo, Karl Marx
Marshallian economics
Primarily about policy, not theory. Sees economics as an engine of analysis used to understand real-world phenomena. Sees institutions as well as political and social dimensions of reality as important. Alfred Marshall, “Principles of Economics,” published late 1800s.
Economic theories
Generalizations about the workings of an abstract economy
Economic model
A framework that places the generalized insights of a theory in a more specific contextual setting.
Economic principle
A commonly held economic insight stated as a law or general assumption.
Pricing mechanism
When quantity supplied > than the quantity demanded, price has a tendency to fall.
When quantity demanded > than the quantity supplied, price has a tendency to rise.
Invisible hand theory
A market economy, through the price mechanism, will tend to allocate resources efficiently.
Microeconomics
The study of how individual choice is influenced by economic forces. Eg: how a specific market price is determined and the quantity sold.
Macroeconomics
The study of the economy as a whole. It considers the problems of inflation, unemployment, business cycles, and growth.
Positive economics
The study of what is, and how the economy works.
Normative economics
The study of what the goals of the economy should be.
Relative scarcity
If we reduce our wants, scarcity will fall
If we increase our efforts to produce more goods or if technological changes allow people to produce more using the same resources, scarcity will fall.
The art of economics
The application of the knowledge learned in positive economics to the achievement of the goals determined in normative economics.
What is the importance of opportunity cost to economic reasoning?
It is the basis of cost/benefit economic reasoning. It takes into account benefits of all other options, and converts these alternative benefits into costs of the decision you’re now making. In economic reasoning, OC will be < the benefit of what you have chosen.
Economic force
Necessary reaction to scarcity. All scarce goods must be rationed in some way. If an economic force is allowed to work through the market, that economic force becomes a market force. The invisible hand is the price mechanism.
