Week 1 - Basic Principles of Economics Flashcards
Relationship between Market Freedom and Income
Suggestive that some market freedom is necessary for economic prosperity
Relationship between Market Freedom and Income Inequality
Suggestive that market freedom need not lead to inequality
What is the Economic Problem
Scarcity
Infinite wants but finite resources (tradeoffs must be made)
What, how, and for whom to produce
What is the Cost-benefit principle
An action should only be taken if, and only if, the benefit from taking the action is greater than the cost
What is Opportunity cost
The next best alternative foregone
What is the Full economic cost
The explicit cost and opportunity cost
What is the Marginal principle
Do more of an activity if its marginal benefit exceeds its marginal cost
If possible, pick the level of activity at which MB = MC
What is the Sunk cost fallacy
People’s tendency to continue with an endeavor they have invested money, effort, or time into - even if the costs outweigh the benefits
What is Positive versus Normative economics
Positive economics is objective and can be measured
Normative economics is based on subjective opinions and beliefs
What do economic models often assume
That economic agents (individuals or firms) respond rationally to incentives
What is a rational agent (x3)
Someone who makes choices that make themselves at least as well-off as the next best alternative, conditional on:
1. preferences (objectives)
2. constraints (income and prices)
3. information
What are Exogenous and Endogenous variables in economic models and theories
Exogenous variables are not explained by the model
Endogenous variables are explained within the model
What is Ceteris paribus
all other variables being unchanged or constant
