Week 1 Flashcards
What is Economics?
It is a broad set of tools that can apply to any type of decision you make daily. “Economics is the study of rational choice under conditions of scarcity.”
What is scarcity?
The difference between the amount of something you want and the amount that is actually available. (ex: air, space, garbage)
What is rational choice?
“calculated, self-interested decisions”. Being able to consider costs and benefits in order to choose the decision that you feel is best, or most rational, for you. Making decisions based on the known consequences.
What is opportunity cost?
“the best alternative forgone when a choice is made” (ex: going to class instead of sleeping an extra hour) There is no such thing as a free lunch! In order to gain something, you had to give something else up. Every choice you make has an opportunity that you did not choose.
What is economics about?
Economics is NOT about money, it is about analyzing the way people make decisions in conditions of scarcity. Predictions can be made about how people will choose to spend their time.
What does it mean for economics to be a study?
Economics is a social, or behavioral, science. It is a disciplined way of thinking through problems.
How is the Scientific Method used in economics?
It is used to help understand the way the ‘real’ world works.
3 Questions economics asks:
- What should we produce?
- How will it be produced?
- Who is going to get it?
What should we produce?
Out of all the possible combinations of things that could be created in our economy, what are we actually going to create out of our limited resources?
How will it be produced?
How will labor, capital, and raw materials be combined in order to produce for our needs and wants?
Who is going to get it?
How will goods and services be divided within the economy to allow everyone to satisfy their needs and wants?
What is a scientific model?
Similar to a map. First, you have a question that you want answered. Choose the map, or model, that best answers your question. You don’t want all of the irrelevant information to clutter and make it difficult for you to answer your question. Keep in mind taxes, consumer income, and stock market. Forget things like hair color and gender. It helps because it simplifies things.
What are Hypothesis?
Predictions about how the world works based on given information. These predictions must be able to be tested.
Example of Hypothesis:
An increase in consumer income will lead to an increase in consumer spending.
Three steps of the Scientific Method:
1) Ask a question
2) Isolate important, related variables and build a model
3) Come up with predictions and hypotheses to test in the real world.
How do we isolate variables?
To isolate variables, you must hold all other variables constant.
What is Ceteris Paribus?
Ceteris Paribus: all other things being equal. The assumption that you are holding all other variables constant. (ex: What will happen to consumer spending if we increase consumer income ‘ceteris paribus’?)
Where can you find economists?
- Business
- Government
- Academics
Economists in Business
They look at the big picture to see when they should launch new products into the economy and foreign economies.
Economists in Government
They do lots of research to collect data about when to impose new taxes and when to finance the government debt. They look at what is happening in the economy in all subjects.
Economists in Academics
Not only teachers, but researchers at Universities to figure out things such as, “What will happen when a minimum wage is imposed?” They publish and present their findings.
What is Positive Economics?
Economics as a predictive, descriptive social science. “How will the world work?” Making observations and asking questions. Answers questions about how the world works.
What is Normative Economics?
It is about making judgments or evaluations. Answers the question “How should the world work?” It is about norms. What is good, what is better, and what is bad. Normative wants the best possibility.
Positive and Normative Economics:
Both closely related. In order to know how things ‘should’ work, you must first understand how things ‘do’ work. You need Positive economics to have Normative economics.
Economic value is created when:
The benefits of a trade exceed the costs of the trade.
Example of how economists may differ in their scientific judgments:
A disagreement on the effects of a change in tax laws on consumer behavior.
The main reason that testing theories is more difficult in economics than in the physical sciences is:
The difficulty in performing an experiment on an economic system.
Microeconomics:
Decision-making process of individuals. Think of the study of a cell. Looking at how the cell works. “How individuals respond to changes in relative prices” Microeconomics is the study of individual firms, households, and markets
Macroeconomics:
About the ‘aggregate’. The combination of households, businesses, government, and net exports. Stepping back and letting the cells merge to become something larger. The study of the economy as an organism. Asks questions about money supply.
What does aggregate mean?
It is a group of economic units acting as a whole.
Money in economics:
Economics is not about money, but money is the life blood of the “organism”, economy. Macro looks at and studies money. Micro ignores money.
What is consumption?
Household spending
What are Nominal Variables?
Variables that are measured in monetary terms. Extremely easy to add up.
What are Real Variables?
Variables that are measured in terms of goods and services. Difficult to add up.
An example of a topic that macroeconomists study is:
The change in the nation’s unemployment rate.
An example of a topic that microeconomists study is:
Ford Motor Company’s market share.
What are graphs used for?
Graphs are used by economists to represent their analysts.
How do graphs work?
Economists use graphs to represent the relationships between two (and sometimes three) variables in a 2-dimensional space.
What is a scatter diagram?
A collection of points on a graph showing the observed relationship between two variables.
What is a scatter plot?
Information arrayed in a two-dimensional space to represent two variables for each point.
What does a direct relationship indicate?
It indicates that the two variables move in the same direction.
How can you tell if you have a direct relationship?
A ‘positive slope’ of a line plotted on a scatter diagram indicates a direct
relationship between the variables.
What is an origin?
Where the x-axis and the y-axis intersect with each other. (0,0)
What are the steps of creating the demand curve?
1) Look at the data
2) Calibrate the axes
3) Plot the data on the graph
4) Connect the points to draw the demand curve
What does the demand curve do?
It shows the relationship between the price of a good and the quantity a consumer wants to buy.
What is the formula for the demand curve?
to plot ‘linear relationship’: y= a+bx
y: price, a: y-int., b: slope, x: quantity
What is the slope?
Slope= rise change y
——– or —————
run change x
What is the slope of a horizontal line?
The slope of a horizontal line is zero.
What is the slop of a vertical line?
The slop of a vertical line is infinite.
What is the slope of a line defined by:
The coefficient of Q in the demand formula P = $12 - .50Q and the change in y divided by the change in x.
Is the vertical intercept in the demand equation the constant number.
Yes because the vertical intercept is the price value where no quantity is demanded and is represented as $12 in the demand formula P = $12 - .50Q.
What does a graph of the demand curve measure?
It measures the inverse relationship between the price of a product and the quantity demanded.
What does the term ‘directly related’ refer to?
If one variable increases when another one increases, or vise versa.
What is a shift in the demand curve caused by?
It is caused by an exogenous variable.
What are exogenous variables?
Examples: changes in consumer income, changes in the price of other goods, and changes in consumer expectations.
When does a negative relationship between variables exist?
A negative relationship exists when one variable increases while the other variable decreases.
What does the slope of a demand curve tell us?
It tells us about the sensitivity of quantity demanded to a change in price.
What does the slope of a demand curve depend on?
It depends on the units in which the variables are measured.
What is elasticity?
The percentage change in the quantity demanded that results from a percentage change in price. Does NOT depend on units!
What is the slope of a demand curve measured by?
It is measured by the change in price divided by the change in the quantity demanded.
Suppose a line shows that every time a family’s income increases by $1.00, the family’s spending increases by $.90. If income increases by $300.00, spending must increase by:
$270.00. You multiply .90 by $300 to get the answer.
What does a relatively flat demand curve indicate?
It indicates that the demand for a product is very sensitive to a change in price.
What does a steeply-sloping demand curve show?
It shows that the change in quantity demanded is not very sensitive to a change in price.
