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25 Cards in this Set
- Front
- Back
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Economics
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The study of how people allocate their limited resources to satisfy their unlimited wants
The study of how people make choices |
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Resources
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Things used to produce other things to satisfy people’s wants
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Wants
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What people would buy if their incomes were unlimited
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With limited income (resources), people must make _____ to satisfy their wants
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choices
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“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.
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Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776
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Defining self-interest
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The pursuit of one’s goals, does not always mean increasing one’s wealth
Prestige Friendship Love |
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Economists assume that individuals act as if motivated by ______ and respond predictably to opportunities for gain
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Self-interest
-So we say these people are acting rationally |
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Rationality Assumption
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The assumption that people do not intentionally make decisions that would leave them worse off
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Incentives
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Rewards for engaging in a particular activity
People respond positively to incentives through choices that make them better off |
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Some examples of incentives
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Responding to positive incentives
Schoolchildren getting gold stars, working to have a “better life” for yourself Responding to negative incentives Fine, penalties, punishments |
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Microeconomics
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The study of decision making undertaken by individuals (or households) and by firms
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Microeconomics is like looking though a ______ to focus on the smaller parts of the economy
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microscope
-Decision of a worker to work overtime or not -A family’s choice of having a baby -An individual firm advertising |
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Macroeconomics
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The study of the behavior of the economy as a whole
Deals with economywide phenomena |
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Macroeconomics deals with _____, or totals—such as total output in an economy
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aggregates
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Modern economic theory ____ micro and macro concepts
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blends
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Models or Theories
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Simplified representations of the real world used as the basis for predictions or explanations
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Assumptions
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The set of circumstances in which a model is applicable
Every model, or theory, must be based on a set of assumptions. |
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Ceteris Paribus Assumption
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Nothing changes except the factor or factors being studied.
“Other things constant” “Other things equal” Equates to controlling variables in science experiment |
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Economics is an ______science
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empirical
Real-world data is used to evaluate the usefulness of a model. Models are useful if they predict economic phenomena. Economic models predict how people react, not how they think. |
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Positive Economics
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Purely descriptive statements or scientific predictions; “If A, then B,” a statement of what is
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Normative Economics
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Analysis involving value judgments; relates to whether things are good or bad, a statement of what ought to be
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Self-interest in economic analysis
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Rational self-interest is the assumption that individuals behave in a reasonable (rational) way in making choices to further their interests.
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Microeconomics versus macroeconomics
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Economics is the study of how individuals make choices to satisfy wants.
Microeconomics is the study of decision making by individual households and individual firms. Macroeconomics is the study of nationwide phenomena, such as inflation and unemployment levels. |
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Economics as a science
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Economists use models, or theories, that are simplified representations of the real world to analyze and make predictions about the real world.
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The difference between positive and normative economics
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Positive economics deals with what is, whereas normative economics deals with what ought to be.
Positive statements are of the “if…then” variety, while normative ask what “should, or could” be. |
