Chapter 1: The Economic Approach Flashcards
(27 cards)
Scarcity
Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like.
Choice
The act of selecting among alternatives. It is the logical consequence of scarcity.
Resources
Inputs used to produce economic goods.
What are the three general categories of resources?
Human resources, physical resources, and natural resources
Examples of human resources
Productive knowledge, skill, and strength of human beings
Examples of physical resources
Tools, machines, and buildings
Examples of natural resources
land, mineral deposits, oceans, and rivers
What other term is often used as a synonym for “physical resources?”
Capital
Objective
A fact based on observable phenomena that is not influenced by differences in personal opinion.
Subjective
An opinion based on personal preference and value judgements.
Rationing
Allocating a limited supply of a good or resource among people who would like to have more of it. When price performs the rationing function, the good or resource is allocated to those willing to give up the most “other things” in order to get it.
Economic theory
A set of definitions, postulates, and principles assembled in a manner that makes clear the “cause-and-effect” relationships
Opportunity cost
The highest valued alternative that must be sacrificed as a result of choosing an option.
Economizing behavior
Choosing the option that offers the greatest benefit at the least possible cost.
Utility
The subjective benefit or satisfaction a person expects from a choice or course of action.
Describe the “incentives matter” postulate of economics.
When the payoff derived from a choice increases, people will be more likely to choose it. Similarly, as the option becomes more costly, less is chosen.
Marginal
Term used to describe the effects of a change in the current situation. For example, a producer’s marginal cost is the cost of producing an additional unit of a product, given the producer’s current facility and production rate.
Marginal analysis: “How much more is the price off this item than the price of that item?” The marginal cost is the “more” you would be paying while the marginal benefit is the amount of utility (satisfaction) you would receive from it.
Secondary effects
the indirect impact of an vent or policy that may not be easily and immediately observable. Secondary effects are also referred to unintended consequences.
Aspirin’s immediate effect is a bitter taste in one’s mouth while the secondary effect is headache relief.
Why is the value of a good or service subjective?
Because preference among individuals greatly vary.
Scientific thinking
Developing a theory from basic principles and testing it against events in the real world. Good theories are consistent with and help explain real-world events. Theories that are inconsistent with the real world are invalid and must be rejected.
What is a meant when economists refer to a theory as it having “predictive value?”
Simply put, economics are validating the theory.
Positive economics
The scientific study of “what is” among economics relationships. It need not be correct; it simply must be testable.
Example: “If the price of gasoline rises, people will buy less gasoline.”
Normative economics
Judgments about “what ought to be” in economic matters. Normative economic views cannot be proven false because they are based on judgments. Normative economic statements can neither be confirmed nor proven false by scientific testing.
Example: “Business firms should not be concerned with profits.”
Ceteris paribus
A Latin term meaning “other things constant” that is used when the effect of one change is being describe, recognizing that if other things changes, they also could affect the result. Economists often describe the effects of one change, knowing that in the real world, other things might change and also exert an effect.
