Chapter 1: Economics: Foundations and Models – Flashcards

People are rational. People respond to economic incentives. Optimal decisions are made at the margin.

Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs.

Economists emphasize that consumers and firms consistently respond to economics incentives.

Economists use the word marginal to mean "extra" or "additional." Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost - in symbols - where MB=MC.

Analysis that involves comparing marginal benefits and marginal costs.

Because we live in a world of scarcity, any society faces the economic problem that it has only a limited amount of economic resources-such as workers, machines, and raw materials-and so can produce only a limited amount of goods and services.

Producing more of one good or service means producing less of another good or service.

the highest-valued alternative that must be given up to engage in that activity

An economy in which the government decides how economic resources will be allocated.

An economy in which the decisions of households and firms interacting in markets allocate economic resources. It is ultimately consumers who decide which goods and services will be produced.

An economy in which most economic decisions result from the interaction between buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

A situation in which a good or service is produced at the lowest possible cost.

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides marginal benefit to society equal to the marginal cost of producing it.

A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.

The fair distribution of economic benefits. There is often a trad-off between efficiency and equity.

Economists rely on economic theories, or models, to analyze real-world issues. Economic models are simplified versions of reality. One purpose of economic models is to make economic ideas sufficiently explicit and concrete so individuals, firms, or the government can use them to make decisions. Economists use economic models to answer questions.

1. Decide on the assumptions to use in the developing model. 2. Formulate a testable hypothesis. 3. Use economic data to test the hypothesis. 4. Revise the model if it fails to explain the economic data well. 5. Retain the revised model to help answer similar economic questions in the future.

Economic models make behavioral assumptions about the motives of consumers and firms. Economists assume that consumers will buy the goods and services that will maximize their well-being or their satisfaction. Similarly, economists assume that firms act to maximize their profits.

Something measurable that can have different values, such as the wages of software programmers.

A statement that may be either correct or incorrect about an economic variable. An economic hypothesis is usually about a casual relationship.

Analysis concerned with what is. Economics is about positive analysis, which measures the costs and benefits during different courses of action.

Analysis concerned with what ought to be.

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Microeconomic issues include explaining how consumers react ot changes in product prices and how firms decide what prices to charge for the products they sell. Microeconomics also involves policy issues, such as analyzing the most efficient way to reduce teenage smoking, analyzing the costs and benefits of approving the sale of a new prescription drug, and analyzing the most efficient way to reduce air pollution.

Someone who operates a business. In a market system, they decide what goods and service to produce and how to produce them.

The practical application of an invention or any significant improvement in a good or in the means of producing a good.

A firm's technology is the processes it uses to produce goods and services.

An organization that produces a good or service

Tangible merchandise

Activities done for others

The total amount of money received from selling a good or service. It is calculated by multiplying the price per unit by the number of units sold.

The difference between its revenue and its costs.

Excludes the cost of some economic resources that the firm does not pay for explicitly.

Includes the opportunity cost of all resources used by the firm.

Consists of all persons occupying a home. They supply the factors of production to the firms in exchange for income.

Firms use factors of production to produce goods and service. The main factors of production are labor, capital, natural resources (including land), and entrepreneurial ability. Households earn income by supplying the firms with the factors of production.

Includes stocks and bonds issued by firms, bank accounts, and holdings of money.

Includes manufactured goods that are used to produce other goods and services. In economics, capital refers to physical capital.

Refers to the accumulated training and skills that workers possess.