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studies the stock-market and corporate finance, personal finance, and future business conditions. It's a social science based on logic.

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What's economics?

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the study of the allocation of limited resources to satisfy our unlimited wants (it's a social science because it's studies people's behavior when it comes to money)

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What's the definition of economics?

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input (e.g. land, human effort skills, machines, factories) produces goods and services

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Define resources.

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When wants are greater than limited resources of land, labor, capital, and entrepreneurship (can also extend to non-material desires like love and knowledge)

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Define scarcity.

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scarcity forces us to choose, and choices are costly because we must give up other opportunities that we value

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What's the economic problem?

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anything that's important for humans (e.g. love and sex) children --> "goods". (e.g. religion: development of institutions), services/goods, time (division of time) = these are all economic matters.

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What does economics involve?

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problem-solving skills, managing money, teaches you to ask intelligent questions

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What does economics teach you?

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the study of the aggregate (total) economy

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What is macroeconomics?

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inflation, unemployment, economic growth (basically economic problems affecting society)

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What are topics of macroeconomics?

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the study of the smaller units within the economy, including the topics of household and firm behavior and how they interact in the marketplace (goods and services)

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What is microeconomics?

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health-care, agricultural subsidies, price of everyday items, distribution of income and impact of labor unions on wages

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What are topics of microeconomics?

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Macroeconomics are the forests and microeconomics are the trees.

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What's an analogy for differentiating between macroeconomics and microeconomics?

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statements used to explain and predict patterns of human behavior based on known facts and phenomena

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What are economic theories?

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Economic theories, through abstraction, provide a broad view of human economic behavior. It is NOT a detailed examination, it's just key points/important info.

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Why do we need to abstract?

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It makes a prediction about human behavior and is then tested. Example: As the price of an item rises, the number of that item sold falls.

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What's a hypothesis?

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the examination of data to see if the hypothesis fits well with the facts. This is easier with chemistry/physics than it is with economics. If the hypothesis does not fit in well with the facts, the hypothesis is thrown out. If a hypothesis is supported, it can be accepted as an economic theory until experimented on.

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What is an empirical analysis?

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We use this to isolate the effects of one variable on another.

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What's the ceteris paribus assumption?

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"let everything else be equal" OR "holding everything else constant"

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What does "ceteris paribus" translate to?

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the idea that if you study harder, you perform better. Ceteris paribus ASSUMES that nothing influences the relationship: like sleep deprivation, studying the wrong material, etc.

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Give an example of ceteris paribus.

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With ceteris paribus, we take out other events that can influence the situation that the theory tries to explain/predict (we ISOLATE the RELATIONSHIP).

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Give a simple explanation of the ceteris paribus assumption.

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because the focus is on human behavior, which is more variable and less predictable.

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Why is observation and prediction more difficult in the social sciences like economics?

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by observing the actions of a large group of people (general patterns).

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How can economics make "reliable" predictions?

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because individuals themselves will behave differently depending on their personality

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In economics, why do we analyze the patterns of large group of people as opposed to individuals?

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patterns of large groups of people

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What is used during theoretical analysis?

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the fact that two events usually occur together (correlation) does not necessarily mean that one caused the other (causation)

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What distinguishes between correlation and causation?

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even if something is true for an individual, it is not necessarily true for a group e.g. if you arrive early to park, what if other people arrive early to park?

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Define fallacy of composition and give an example.

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an objective, value-free approach, utilizing the scientific method (in evaluating evidence-- impact of variable A on variable B). For example, while you can have a statement saying "A posirent controls are imposed, vacancy rates will fall." While this is a positive statement, it can still be untrue; it is still a testable statement.

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What is positive analysis?

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a subjective, biased approach; expressing your opinion or suggesting what SHOULD happen or what might OUGHT to happen. Example: incomes should be more equally distributed. A POSITIVE economic question will be how work behaviors change.

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What's a normative analysis?

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A normative statement would be to say that everyone should have universal health care, and a testable positive statement would be that universal health care would lead to greater worker productivity. Normative statement: how it should work Positive statement: how it actually works

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What's the difference between positive versus normative statements? Give an example.

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when they use normative statements, and when they emphasize facts over other facts to support their own hypothesis, their philosophy on freedom vs. fairness, and their view of a given economic theory for the policy in question

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Why do economics disagree?

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rent control, import tariffs, export restrictions, the use of wage and price controls to curb inflation, and the minimum wage

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What do most economics agree on?

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the physical and mental effort used by people in the production of goods and services

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Define labor.

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the natural resources used in the production of goods and services (trees, animals, water, space of land, minerals, etc)

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Define land.

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the equipment and structures used to produce goods and services (office buildings, tools, machines, research and development, factories, education = increases the potential to create more goods and services in the future)

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Define capital.

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the productive knowledge and skill people receive from education and on-the-job training

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Define HUMAN capital.

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the process of combining labor, land, and capital together to produce goods and services (entrepreneurs make the tough and risky decisions about what and how to produce goods and services, improve production techniques, create new products = want to make a profit). Ordinary people can be entrepreneurs if they want to find better ways to manage our households or our study time.

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Define entrepreneurship.

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items we value or desire

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Define goods.

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an intangible act that people want (legal, medical, dental services)-- intangible because they are not clearly visible but they're there.

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Define service.

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scarce, but they are what we value

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Goods and services can be...

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competition for the available goods and services

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Scarcity ultimately leads to what?

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items that we do not desire or want (garbage, pollution, weeds, crime)

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Define bads.

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when people pay to eliminate a bad like garbage, this removal of garbage turns into a good

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How does a bad turn into a good?

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that we have to make wise choices (we can't have all that we want because we don't have unlimited resources)

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What does scarcity mean?

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the highest or best forgone (go without) opportunity resulting from a decision. When we are forced to choose, we give up the next highest-valued alternative. For example, buying a car means you won't be able to afford a vacation. Or, time spent running costs time that could have been spent with friends or studying for an upcoming exam.

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Define opportunity cost and give an example.

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multi-tasking. However, there's a trade-off: reduction in safety

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Give an example of a LOW opportunity cost.

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money price is the opportunity cost (because you could've used the money to buy other stuff). Same goes with non-money price (i.e. time spent looking for items, standing in line, etc--could've used time for something else).

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Give an example of an opportunity cost when money price (the amount you pay) is involved.

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(lunches can apply to anything else); Because the production of anyg ood uses up some of society's resources, there is no such thing as a free lunch. while you personally don't pay for them, they are technically not "free", because the preparation of food (food-service workers, plows, fertilizer, etc) are not free. They use society's scarce resources to produce something "free", which could've been used to produce something ELSE of value (that's the issue).

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Why are "free" lunches not free?

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focusing on the additional, or incremental, choices; involves the EFFECTS of adding to or subtracting from the current situation (small, incremental changes to a plan of action)

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Define marginal thinking.

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An airline selling $400 per seat, and people waiting on standby. It would be wise to sell them $300 per seat, because the airline will have to pay ALL seats, even the unoccupied ones. The additional (marginal) costs are minimal (slight wear and tear on plane, handling some extra baggage, meals). It's either that or no money. Or during an auction, we accept the greater offer (the marginal cost); and the value we place on the good that the offer exceeds is called the marginal benefit.

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Give examples of marginal thinking.

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increasing total profits, even if it means selling at less than-average cost of production.

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What can we use marginal thinking for?

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individuals (usually) will pursue an activity if the EXPECTED marginal benefits are greater than the EXPECTED marginal costs (just being sensible; logical)

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Define rule of rational choice.

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the difference between the EXPECTED marginal benefits and EXPECTED marginal costs

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Define net benefits.

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The net benefits change when you snooze to get extra sleep (marginal benefit in the morning) but knowing you'll miss an exam (marginal cost). The net benefit is just the difference between the marginal benefits and the marginal costs.

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Give an example of net benefit involving rational choice.

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comparing the expected marginal benefits and the expected marginal costs to determine the best level to consume, produce, or develop policies.

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What is the rule of rational choice used for in economics?

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Three employees; we take the net benefit of each (marginal benefit minus marginal cost) and if it's a negative number, the rule of rational choice tells us to fire that employee

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Give a situation involving rule of rational choice.

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how MUCH risk we're willing to take, because at a certain point the marginal costs will be too high and problematic. Additional safety can come only at higher costs. We must weigh the benefits and costs. So we must analyze evidence to see how additional safety might benefit us (or not). With law enforcement added, this might control the cost/benefit equation.

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With higher marginal costs, what must we consider?

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represents the potential total output combinations of two goods available to a society, given its resources and existing technology (combines concepts of scarcity, choice, and trade-offs)

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What is a production possibilities curve?

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an economy's potential for allocating its limited resources in producing various combinations of goods in a given time period

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What does a production possibilities curve illustrate?

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Expected grade in economics on the y-axis and expected grade in accounting on the x-axis: this shows the concept of trade-offs. If you study ten hours a week, moving down the production possibilities curve shows that if you use your time to study accounting instead of economics you can raise your grade in accounting but at the expense of lowering your grade in economics. If we were to increase the # of hours, we'd need a new graph.

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Give an example of a production possibilities curve.

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that the opportunity costs are CONSTANT.

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What does a straight-line production possibilities curve mean?

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Each point ON the production possibilities CURVE indicates the number of food and shelter that can be produced in a given time period (taking into account the resources available in the economy). All the points ON the curve are EFFICIENT. If you were to take a point INSIDE of the curve (inside shaded area), this would be INEFFICIENT because the economy is not using all of its scarce resources maximally with minimal expense (efficiently). Choosing a point OUTSIDE of the curve shows that it's NOT attainable at the present time.

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Explain the production alternatives on the BOWED (curved) production possibilities curve.

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requires society to use its resources (including workers) to the fullest extent-- no wasted resources.

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What is efficiency?

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if the economy is operating within the production possibilties curve

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When is the economy operating inefficiently?

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We can either employ more workers or put them to better use. Also, we can adjust a position on the curve, getting the most out of our scarce resources without wasting anything.

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Using a production possibilities curve, what can we do to increase effienciency?

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No, it just shows you different possibilities and which possibilities are not best because some resources are wasted.

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Can a production possibilities curve tell us which option is best?

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When you get more out of a resource, you sacrifice the other.

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How does opportunity cost relate to a production possibilities curve?

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as more of one item is produced by an economy, the OPPORTUNITY COST of additional units of that product rises. So moving from point A to B increases food output by 20 but reduces the production of shelter from 4 to 0 (by 4). From B to C food output increases by 20 but shelter output decreases by 8. This difference shows us that opportunity costs have NOT remained constant; but have risen, as more units of food and fewer units of shelter are produced (that's why it's a bowed-curve).

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What is the law of increasing opportunity cost?

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when, for example, you train skilled carpenters to become farmers (not very smart)

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When does the producing more goods become increasingly costly?

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each addition unit of something costs society more and more of the other good compared

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Put simply, what is the law of increasing opportunity cost?

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by an outward shift (to the left) of the production possibilities curve, indicating an increase in the possibility of producing more of all goods (or more of one over the other)

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How do we show economic growth on the production possibilities curve?

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people who have education and relevant workplace expertise

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Give examples of human capital.

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No. You just get more outputs, but this doesn't mean that there are more resources (there is no such thing as a "free" lunch). There's always sacrifices involved.

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Does economic growth eliminate scarcity? Explain.

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Capital goods: machines, factories, tools and education-- goods that will produce more goods/more expansion in future (profit) (more future-oriented) Consumer goods: pizza, digital cameras, cellphones, etc (more present-oriented)

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What's the difference between capital goods and consumption goods?

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More capital goods (investing for the future) will result in a greater economic growth (i.e. an outward/left shift in production) and more consumption goods (investing in present goods) will contribute to less economic growth (i.e. an inward/right shift in production). Canada is more into consumption.

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How do capital goods vs consumption goods relate to a production possibilities curve?

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For example, a technological advancement in agriculture might mean more units of food, but it could also mean more units of food AND house, since we can use the goods produced through agriculture to make more housing (so it's an outward growth/shift to the right).

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What are the effects of a technological change on the production possibilities curve? Explain with an example.

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We need economic growth to increase outputs.

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How can we get the unattainable on the production possibilities curve?

ECONOMICS: Chapter 1 – Flashcards

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