Module 1 Study Guide Flashcards
What is the definition of economics?
the study of how individuals,
governments, firms, and nations make choices on
allocating scarce resources to satisfy their
unlimited wants.
Explain how scarcity leads to tradeoffs.
When there are limited resources due to scarcity, we have to make tradeoffs or choices about what we’re going to use those resources for. (If you have limited money, you may have to choose between going out to dinner or going to a movie. You may not be able to afford to do both. Therefore, that scarcity leads to a tradeoff where you have to choose to get one thing while sacrificing another. These resources can be money, time, or any other goods that can be gained or sacrificed.)
What is the definition of opportunity cost?
Opportunity cost is what a person sacrifices when they choose one option over another. Opportunity cost can be in terms of time, money, or any other goods that are given up when you make a choice.
What is meant by making choices at the margin?
Making choices at the margin is based on the idea that we make choices one at a time. For instance, someone is more likely to choose to have a cup of coffee at six different times throughout the day than to choose at the beginning of the day to have 6 cups of coffee that day.
What is meant by making choices at the margin?
Making choices at the margin is based on the idea that we make choices one at a time. Marginal in economics always means one more. For instance, someone is more likely to choose to have a cup of coffee at six different times throughout the day than to choose at the beginning of the day to have 6 cups of coffee that day. These choices are made based on the marginal benefits and costs. (Not just monetary- can be time, happiness, health, etc.)
Give an example of the difference between microeconomics and macroeconomics.
The microeconomic perspective focuses on parts of the economy: individuals, firms, and industries. The macroeconomic perspective looks at the economy as a whole, focusing on goals like growth in the standard of living, unemployment, and inflation.
What is an example of a positive statement and a normative statement?
A statement of fact or hypotheses is a positive statement. They can be tested or demonstrated to be false. An example would be, “It’s raining outside” or “Jeff Bezos is a billionaire”. A normative statement is a statement that makes a value judgment. No one can prove the statement is correct or incorrect. An example would be “We should do more to combat racism and poverty” or “Corporations and billionaires are too rich”.
Identify two differences between a traditional and a market economy.
“Traditional economies organize their economic affairs the way they have always done (i.e., tradition). Occupations stay in the family. Most families are farmers who grow the crops they have always grown using traditional methods. What you produce is what you get to consume. Because things are driven by tradition, there is little economic progress or development.”
“In a market economy, decision-making is decentralized. Market economies are based on private enterprise: the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals. Businesses supply goods and services based on demand. (In a command economy, by contrast, resources and businesses are owned by the government.) What goods and services are supplied depends on what is demanded. A person’s income is based on his or her ability to convert resources (especially labor) into something that society values. The more society values the person’s output, the higher the income (think Lady Gaga or LeBron James). In this scenario, economic decisions are determined by market forces, not governments.”
Describe the flow of money in a simple circular flow diagram.
The circular flow model provides an overview of flows of money and goods and services between product and factor markets and suggests how these markets are linked to one another.
Describe the flow of money in a simple circular flow diagram.
The circular flow model provides an overview of flows of money and goods and services between product and factor markets and suggests how these markets are linked to one another.
A simple circular flow diagram pictures the economy as consisting of two groups—households and firms—that interact in two markets: the goods and services market in which firms sell and households buy, and the factor market in which households sell factors of production to business firms or other employees.
Of course, in the real world, there are many different markets for goods and services and markets for many different types of labor. This simple version of the circular flow model is stripped down to the essentials, but it has enough features to explain how the product and factor markets work in the economy. It would be easy to add details to this basic model if you wanted to introduce more real-world elements, like financial markets, governments, and interactions with the rest of the globe (imports and exports).
