Chapter 1; The Five Foundations of Economics – Flashcards
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study of how people allocate their limited resources to satsify their nearly unlimited wants
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Economics
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the limited nature of society's resources
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Scarcity
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the study of the individual units that make up the economy
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Microeconomics
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the study of the overall aspects of a working economy: inflation, growth development, interest rates, productivity of the economy as a whole
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Macroeconomics
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Incentives, trade-offs, opportunity cost, marginal thinking, principle that trade creates value
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Five Foundations of Economics
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factors that motivate you to act or exert effort; help economist explain how decisoons are made
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Incentives
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Encourage action; end of the year bonuses
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Positive Incentives
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Reduce actions; speeding tickets
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Negative Incentives
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When a decision maker has to choose a course of action
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Trade-offs
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Highest valued alternative that must be sacrificed in order to get something else; each time we make a choice we lose the chance to do something else
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Opportunity-Cost
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requires a decision-maker to weigh the extra benefits against the extra costs
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Marginal Thinking
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requires a purposeful evaluation of the available opportunities to make the best decision possible
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Economic Thinking
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the added value of making the effort
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Marginal benefit
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bring buyers and sellers together to exchange goods and services
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Markets
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the voluntary exchange of goods and services between two or more parties
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Trade
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refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can
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Comparative Advantage
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Trade-offs create opportunity cost; When we sacrifice one thing to obtain another is a trade-off; Whenever you make a trade-off, the thing that you do not choose is your opportunity cost
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Trade-offs vs. Opportunity Cost
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People find ways around policies to get what they want: Welfare, Australian birthrate
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Why do incentives sometimes create unintended consequences?
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Participants in markets can specialize in the production of goods and services that they have a comparative advantage in making
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Why does trade create value?
