Flashcards in Chapter One Deck (15):
What is scarcity?
The condition that arises because wants exceeds the ability of resources to satisfy them. Faces w scarcity w must make choice and choose among the available alts. The choices we make depend on the incentives we face.
Economics is the social science that studies the choices that individuals, businesses, governments and entire societies make as they cope with scarcity, the incentives that influence those choices and the arrangements that coordinate them.
What are the two parts economics can be divided into?
Microeconomics: the study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments
Macroeconomics: the study of the aggregate or total effect in the national economy and the global economy of the choices that individuals businesses and governments make
Define self and social interest
The choices that are best for the individual who makes them are choices made in the pursuit of self interest
The choices that are best for society as a whole are choices made in the social interest
What are the six ideas that define the economic way of thinking?
Choice is a trade off
Cost us what you must give up to get something
Benefit is what you gain from something
People make rational choices by comparing benefits and costs
Most choices are how much choices made at the margin
Choices respond to incentives
Define choice is a trade off
Because we face scarcity we must make choices. To make a choice we select from the alts. Whatever choice you make, you could have chosen something else. You can think about your choices as a trade off. A trade off is an exchange - giving up one thing to get something else.
Explain cost and benefit
Cost: what you must give up ;; opportunity cost is the best thing that you must give yo to get something thus the highest valued alternative forgone.
Benefit: what you gain
Benefit is the gain or pleasure that something brings. Benefit is measured by what you are WILLING to give up
Explain rational choice
A rational choice is a choice that uses the available resources to best achieve the objective of the person making the choice. We make rational choices by comparing costs and benefits
Explain how much - choosing at the margin
A choice made at the margin is a choice made by comparing all the relevant alternatives systemically and incrementally
Explain marginal cost and marginal benefit
Marginal cost - is the opportunity cost of a one unit increase in an activity; the marginal cost of something is what you must give up to get one additional unit of it
Marginal benefit: is the what you gain when you get one more unit of something; the marginal benefit of something is measure by what you are willing to give up to get one additional unit of it
You make a rational choice when you take those actions for which marginal benefits exceed or equals marginal costs
An incentive is a reward or penalty that encourage or discourages an action
Define economics as a social science
Economists try to understand and predict the effects of economic forces by using the scientific method first developed by physicists. The scientific method is a common sense way of systemically checking what works and what doesn't works economist begins w a question or a puzzle about the cause and effect arising from some observed facts
What are the types of economic models and define it
Once an economists identify question they build a modern that provides a possible answer to the question of interest. An economic is a description of some feature of the economic world that includes only those features assumed necessary to explain the observed facts
How to check economic model against the facts?
Natural experiments: a situation that arises in the ordinary course of economic life in which the one factor of interest is different and other things are equal.
Statistical investigations: looks for a correlation- a correlation is the tendency for the values of two variables to move together in a predictable and related way.
Economic experiment: puts people in a decision making situation and varied the influence of one factor at a time to discover how they respond