Review CH 1-4 Flashcards
What is economics?
Economics is the allocation of scarce resources: who gets what and why
What are the four categories of human needs/desires?
- Things perceived as needed for survival
- Perceived necessities (what you need as a person in society (i.e. cell phone, AC))
- Conveniences (makes life easier)
- Luxuries
What is the economic way of thinking?
- Use models
a. Simplify
b. Ceterus paribus - Marginal thinking
- Incentives matter
What are the key principles of economics?
- Opportunity cost
- Marginal principle
- Principle of voluntary exchange
- Diminishing returns
- Real-nominal principle
What are the epistemic values?
- Predictive accuracy
- Internal coherence and external consistency
- Unifying power
- Fertility
- Simplicity
What are the cognitive biases?
- Availability bias
- Conformation bias (most important)
- Cognitive dissonance
- Festering
Availability Bias
people talk about what they’ve seen
Conformation Bias
bias that leads you to interpret, favor or recall information that confirms preexisting hypothesis; dismiss information that doesn’t fit your preexisting hypothesis and latch on to information that confirms it
Cognitive dissonance
mental stress or discomfort experienced by an individual who is confronted by new information that conflicts with existing beliefs, ideas, or values
Festering
cognitive dissonance becomes psychologically uncomfortable - resistant to information that goes against your own
What is the economic model?
a logical (usually mathematical) representation of whatever a priori or theoretical knowledge economic analysis suggests is most relevant for treating a particular problem (a priori: related to or derived by reasoning from self-evident propositions; being without examination or analysis)
Variable
quantity free to take on any number of permissible values. Exogenous and endogenous variables.
Exogenous variable
having a value determined outside the model. Value is taken as “God-given” and not to be determined by economists
Endogenous Varibale
having its value determined jointly by the particular values taken by the exogenous variables and by the logical relationships among variables within the model
Solution to Economic Model
relationship between each endogenous variable and only exogenous components of a model
What are the two assumptions made by the parsimonious model?
- Individuals pursue their own self-interest: incentives matter!
- In pursuit of self-interest, people exchange one thing for another (Principle of voluntary exchange)
What is the parsimonious model?
people respond based on own self-interest
What are the implications made by assumptions that people can advance their self-interest through trade?
- Price controls lead to shortages
- “Price gouging” but some benefits
- The Kaiser’s failed WW1 Submarine campaign
- Charges for directory assistance
How do societies allocate scare resources?
- War
- Custom
- Commercial societies
- Command and control
What are some features of a commercial society (market society)?
- Lots of specialization and division of labor
- Lots of markets - but lots of non-market arrangements as well
- Lots of anonymous exchanges - but lots of bargaining amongst a few as well
What is a market transaction?
an exchange that is voluntary: each party can veto it, and (subject to the rules of the marketplace) each freely agrees to the terms
What is a market?
the forum for carrying out such exchanges.
What is a commodity market?
lots of buyers and sellers; fairly standardized, no question about what you are buying; markets of wheat, ready mix concrete, etc.; know what you are getting
What is a matching market?
important group of market, the terms of the exchange/transaction, while they involve price, price is not the most important component; still matching two sides to a transaction of some sort; colleges/universities, fraternities/sororities, dating market
