Introduction to Economics Flashcards
What is Economics?
Economics is the study of how individuals, businesses, and societies allocate scarce resources to satisfy their unlimited wants and needs.
Micro vs. Macro
Microeconomics focuses on individual consumers and businesses.
Macroeconomics looks at the economy as a whole, including inflation, unemployment, and economic growth.
Tragedy of the Commons
A situation where individuals acting in their self-interest deplete shared resources, leading to long-term loss for everyone.
Positive/Negative Externalities
Positive Externalities: Benefits enjoyed by third parties (e.g., education, vaccines).
Negative Externalities: Costs imposed on third parties (e.g., pollution, secondhand smoke).
Scarcity
The fundamental economic problem of having limited resources to meet unlimited wants.
Reducing Scarcity
Improving technology
Increasing efficiency
Expanding resource availability
What Causes Scarcity?
Limited resources
Unlimited wants
Inefficient allocation
Fundamental Assumptions
People act rationally in their self-interest.
Resources are limited.
Trade-offs are necessary.
Inferior Goods vs. Luxury Goods
Inferior Goods: Demand decreases as income rises (e.g., instant noodles).
Luxury Goods: Demand increases as income rises (e.g., designer clothing).
Factors of Production
Land (natural resources) Oil, water, forests
Labor (human effort) Workers in a factory
Capital (machines, tools) Machines, buildings
Entrepreneurship (risk-taking and innovation) Startup founders
Inputs vs. Outputs
Inputs: Resources used to produce goods/services.
Outputs: Finished goods and services.
Types of Labor
Inputs: Resources used to produce goods/services.
Outputs: Finished goods and services.
Unskilled: Requires minimal training (e.g., fast-food workers).
Skilled: Requires specialized training (e.g., electricians).
Semi-skilled: Some training required (e.g., factory workers).
Professional: High-level education and expertise (e.g., doctors).
Goods vs. Services
Goods: Tangible products (e.g., cars, clothing).
Services: Intangible actions performed (e.g., teaching, healthcare).
Durable vs. Nondurable Goods
Durable Goods: Last more than three years (e.g., appliances).
Nondurable Goods: Consumed quickly (e.g., food, paper towels).
Bads
Items with negative value (e.g., pollution, waste).
Economic Models
Circular Flow Model: Demonstrates interactions between households and businesses.
Real Flows vs. Money Flows: Goods/services vs. financial transactions.
Why Simplify?: To better understand complex systems.
Goal: Show economic interdependencies.
Economic Decision Makers
Households/Firms: Consumers and producers.
Markets: Places where goods and services are exchanged.
Resource vs. Product Markets: Input vs. output markets.
Economic Fallacies
Association-Is-Causation: Correlation does not imply causation.
Composition: What is true for an individual may not be true for a whole group.
Rational Self-Interest
Individuals make decisions to maximize their benefit.
Positive vs. Normative Statements
Positive: Fact-based.
Normative: Opinion-based.
Opportunity Cost
The value of the next best alternative foregone.
Trade-Offs
Decisions require choosing one thing over another.
Explicit/Implicit Costs
Explicit: Direct, monetary payments.
Implicit: Indirect, opportunity costs.
Sunk Costs
Past costs that cannot be recovered.
