Chapter 1: The Five Foundations of Economics – Flashcards
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Is a social science that studies the choices individuals, business, government, and entire societies make. Ex: Buying concert tickets or importing cars.
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Economics
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The limited nature of society's resources. Economics discusses all about the allocation of resources.
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Scarcity
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Deals with individuals; individual's demand, tax
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Microeconomics
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Deals with the nation; unemployment, GDP
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Macroeconomics
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1)What: quantities of corn, home, hospital 2)How: should we trade or invest? [Resources: Land, labor, capital - the "impossible trinity"] 3)For whom: individuals, business, entire society
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Three Invaluable questions in economics:
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1)Incentives 2)Trade-offs 3)Opportunity Cost 4)Marginal Thinking 5)Trade Creates Value
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5 Foundations of Economics
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People always respond to incentives. Positive incentives: tax refund, pay increase. Negative incentives: jails, tickets, getting fired. Direct or indirect.
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Foundation 1: Incentives
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With scarcity, decisions incur costs
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Foundation 2: Trade-offs
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Second best alternative - true cost of everything is opportunity cost
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Foundation 3: Opportunity Cost
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Evaluate whether the benefit of one more of something is greater than the cost or not. Marginal benefit vs. Marginal Cost - MOST important
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Foundation 4: Marginal Thinking
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Voluntary exchange of goods and services between two or more parties - trade ALWAYS creates value. With trade: you will be producing the product that you are good at. Without trade: you will have to produce everything.
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Foundation 5: Trade Creates Value
