Principles of Economics Chapter 1 Flashcards
The scope and method of economics
economics
The study of how individuals and societies choose to use the
scarce resources that nature and previous generations have provided.
The key word in this definition is choose.
Economics is a behavioral, or social, science. In large measure, it is the study of how people make choices. The choices that people make, when added up, translate into societal choices.
Why Study Economics?
To Learn a Way of Thinking
Three fundamental concepts:
Opportunity cost
Marginalism
Efficient markets
opportunity cost
The best alternative that we forgo, or give up, when we
make a choice or a decision.
scarce
Limited.
marginalism
The process of analyzing the additional or incremental costs or
benefits arising from a choice or decision.
efficient market
No Free Lunch
A market in which profit opportunities are eliminated almost instantaneously.
Industrial Revolution
The period in England during the late eighteenth and early nineteenth centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities.
The study of economics
teaches us a way of thinking and helps us make decisions.
is an essential part of the study of society.
To be an informed citizen
requires a basic understanding of economics.
microeconomics
The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, firms and households.
macroeconomics
The branch of economics that examines the economic behavior of aggregates—income, employment, output, and so on—on a national scale.
Difference between macro and micro
Microeconomics looks at the individual unit—the household, the firm, the industry. It sees and examines the “trees.”
Macroeconomics looks at the whole, the aggregate. It sees and analyzes the “forest.”
Behavioral economics
uses psychological theories relating to emotions and social context to help understand economic decision making and policy. Much of the work in behavioral economics focuses on the biases that individuals have that affect the decisions they make.
Comparative economic
systems
examines the ways alternative economic systems function. What are the advantages and disadvantages of different systems?
Econometrics
applies statistical techniques and data to economic problems in an effort to test hypotheses and theories. Most schools require economics majors to take at least one course in statistics or econometrics.
Economic development
focuses on the problems of low-income countries. What can be done to promote development in these nations? Important concerns of development for economists include population growth and control, provision for basic needs, and strategies for international trade.
Economic history
traces the development of the modern economy. What economic and political events and scientific advances caused the Industrial Revolution? What explains the tremendous growth and progress of post-World War II Japan? What caused the Great Depression of the 1930s?
Environmental
economics
studies the potential failure of the market system to account fully for the impacts of production and consumption on the environment and on natural resource depletion. Have alternative public policies and new economic institutions been effective in correcting these potential failures?
Finance
examines the ways in which households and firms actually pay for, or finance, their purchases. It involves the study of capital markets (including the stock and bond markets), futures and options, capital budgeting, and asset valuation.
Health economics
analyzes the health care system and its players: government, insurers, health care providers, and patients. It provides insight into the demand for medical care, health insurance markets, cost-controlling insurance plans (HMOs, PPOs, IPAs), government health care programs (Medicare and Medicaid), variations in medical practice, medical malpractice, competition versus regulation, and national health care reform.
The history of economic
thought
which is grounded in philosophy, studies the development of economic ideas and theories over time, from Adam Smith in the eighteenth century to the works of economists such as Thomas Malthus, Karl Marx, and John Maynard Keynes. Because economic theory is constantly developing and changing, studying the history of ideas helps give meaning to modern theory and puts it in perspective.
Industrial organization
looks carefully at the structure and performance of industries and firms within an economy. How do businesses compete? Who gains and who loses?
International economics
studies trade flows among countries and international financial institutions. What are the advantages and disadvantages for a country that allows its citizens to buy and sell freely in world markets? Why is the dollar strong or weak?
Labor economics
deals with the factors that determine wage rates, employment, and unemployment. How do people decide whether to work, how much to work, and at what kind of job? How have the roles of unions and management changed in recent years?
Law and economics
analyzes the economic function of legal rules and institutions. How does the law change the behavior of individuals and businesses? Do different liability rules make accidents and injuries more or less likely? What are the economic costs of crime?
Public economics
examines the role of government in the economy. What are the economic functions of government, and what should they be? How should the government finance the services that it provides? What kinds of government programs should confront the problems of poverty, unemployment, and pollution? What problems does government involvement create?
Urban and regional
economics
studies the spatial arrangement of economic activity. Why do we have cities? Why are manufacturing firms locating farther and farther from the center of urban areas?
positive economics
An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
normative economics
An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.
model
A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables.
variable
A measure that can change from time to time or from observation to observation.
Ockham’s razor
The principle that irrelevant detail should be cut away.
ceteris paribus, or all else equal
A device used to analyze the relationship between two variables while the values of other variables are held unchanged.
Using the device of ceteris paribus is one part of the process of abstraction. In formulating economic theory, the concept helps us simplify reality to focus on the relationships that interest us.
post hoc, ergo propter hoc
Literally, “after this (in time), therefore because of this.”
A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.
fallacy of composition
The erroneous belief that what is true for a part is necessarily true for the whole.
empirical economics
The collection and use of data to test economic theories.
Four criteria in judging economic outcomes:
- Efficiency
- Equity
- Growth
- Stability
efficiency
In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost.
equity
Fairness.
economic growth
An increase in the total output of an economy.
stability
A condition in which national output is growing steadily, with low inflation and full employment of resources.
graph
A graph is a two-dimensional representation of a set of numbers, or data.
time series graph
A time series graph shows how a single measure or variable changes over time.
positive relationship
A relationship between two variables, X and Y, in which a decrease in X is associated with a decrease in Y, and an increase in X is associated with an increase in Y.
negative relationship
A relationship between two variables, X and Y, in which a decrease in X is associated with an increase in Y and an increase in X is associated with a decrease in Y.
slope
A measurement that indicates whether the relationship between variables is positive or negative and how much of a response there is in Y (the variable on the vertical axis) when X (the variable on the horizontal axis) changes.
A positive slope
indicates that increases in X are associated with increases in Y and that decreases in X are associated with decreases in Y.
A negative slope
indicates the opposite—
when X increases, Y decreases; and when X decreases, Y increases.
