Flashcards with Answers on Chapter 1 – Flashcard
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The Social Science that studies the choices individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influences and reconcile those choices. "Economics is the study of trying to satisfy unlimited wants with limited resources."
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What is Economics
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The study of the choices that individuals and businesses make, the way those choices interact with markets and influence governments
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Define Microeconomics.
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The Study of the performance of the national and global economy.
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Define Macroeconomics.
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i. A Choice is a trade off ii. People make rational choices by comparing benefits and costs iii. Benefit is what you gain from something iv. Cost is what you give up to get something v. Most choices are made at the margin (how much choices) vi. Choices Respond to incentives.
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What are the 6 key ideas that make up the economic way of thinking?
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No, not everyone is impoverished, but everyone faces scarcity. For example time is scarcity that everyone faces.
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Are scarcity and poverty the same thing? Explain.
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Everyone faces scarcity, scarcity causes people to make choices. People base their choices on incentives.
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Explain the reasoning in The Economic Way of Thinking
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One that compares costs and benefits and achieves the benefits over the cost for the person making the choice. Only the wants of the person making the choice are relevant.
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What is a Rational Choice?
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The gain or pleasure that something brings based on preferences
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When making a rational choice, what is a benifit?
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What the person must give up. It is calculated through Opportunity Cost, which is the highest valued alternative that must be given up to get it.
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When making a rational choice, what is a cost?
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The highest valued alternative that must be forgone.
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What is Opportunity Cost?
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Choosing at the margin means looking at the trade-offs that arise from making small changes in activity. To make a choice at the margin evaluate the consequences of making incremental changes in the use of your time.
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What does it mean to choose at the margin? How does one choose at the margin?
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The benefit from pursuing an incremental increase in activity.
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What is marginal benefit?
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The opportunity cost of pursuing an incremental increase in activity is the marginal cost.
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What is Marginal Cost?
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If the marginal benefit from an incremental increase in activity exceeds its marginal cost, your rational choice is to do more of that activity.
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How do weighing marginal benefit and marginal cost relate to rational choices?
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How do choices and up determining what, how, and for whom goods and services get produced. When do the choices made in the pursuit of self-interest also promote social interest?
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What are the two big economic questions?
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The objects that people value and produce to satisfy human want.
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What are goods and services?
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Goods and services are produced by using productive resources that economists call factors of production.
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How are good and services produced?
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Land- "The gifts of Nature" Labor- The work time and work effort that people devote to producing goods and services Capital- The tools, instruments, machines, building, etc that people businesses use to produce goods.. Entrepreneurship- The human resource that organizes that labor and capital
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What are the factors of production? Explain.
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The quality of labor depends on human capital- the knowledge and skill that people obtain from education, on the job training, and work experience.
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What determines the quality of human labor?
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The incomes that people earn
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What dictates who gets the goods and services?
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Land earns rent Labor earns wages Capital earns interest Entrepreneurship earns profit
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What does each factor of production produce?
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Globalization The Information Revolution Climate Change Economic Instability
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What are the four topics that generate discussion and illustrate the tension between self-interest and social interest?
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The choice that you think are the best ones available for you.
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Describe Self-interest
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Choices that the best ones for society as a whole.
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Describe Social Interest
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Economists seek to discover how the economic world works. They do this through distinguishing between positive and normative statements
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How do economists go about their work as social scientists?
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Statement that describes what is. It says what is currently believed about the way the world operates. It can be right or wrong, but we can test it by checking it against the facts
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What is a positive statement?
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Statement about what ought to be. It depends on values and cannot be tested.
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What is a normative statement?
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A description of some aspect of the economic world that includes only those features that are needed. It is tested by comparing its predictions with the facts.
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What is an economic model? How is it tested?
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Economics is a useful toolkit for advising governments and businesses and for making personal decisions. All the policy questions that economists provide advice involve a blend of the positive and the normative.
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How do economists go about their work as social scientists?
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The boundary line between those combinations of goods and services that can be produced and the combinations that cannot.
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What is the Product Possibilities Frontier?
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The production of goods and services at the lowest possible cost.
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What is production efficiency?
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Tradeoffs happen in every real-world situation. This is because at any given time we have a fixed amount of land, labor, capital, entrepreneurship, and a given state of technology.
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Why do tradeoffs happen?
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The Opportunity cost of an action is the highest-valued alternative forgone. The PPF makes this idea precise and enables us to calculate opportunity.
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How does opportunity cost relate to the PPF?
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It is the decrease in the quantity produced of one good divided by the increase in the quantity of another good.
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Explain how opportunity cost is ratio?
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The marginal cost of a good is the opportunity cost of producing one more unit of it. We calculate marginal cost from the slope of the PPF. As the quantity of the "pizzas" produced increases, the PPF gets steeper and the marginal cost of pizza increases.
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What is marginal cost? How do we calculate it?
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The benefit received from consuming one more unit of it. It is subjective because it depends on people's preferences- their likes and dislikes.
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What is marginal benefit? Explain why it's subjective?
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They stand in stark contrast because preferences describe what people like and want and the production possibilities describe the limits or constraints on what is feasible.
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Compare Marginal Benefits and preferences to marginal cost and production possibilities.
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We use the marginal benefit curve to illustrate preferences, which is a curve that shows the relationship between a good's marginal benefit and the quantity consumed of that good
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What is the device used to illustrate preferences?
