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41 Cards in this Set

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Scarcity

Scarcity The condition that arises because wants exceed the ability of resources to satisfy them.

Economics

The social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them.

Microeconomics

The study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments.


Some examples of microeconomic questions are: Will you buy a 3-D television or a standard one? Will Nintendo sell more units of Wii if it cuts the price? Will a cut in the income tax rate encourage people to work longer hours?

Macroeconomics

The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.

2 Big Questions

1 - How do choices end up determining what, how, and for whom goods and services get produced?


2 - When do choices made in the pursuit of self-interest also promote the social interest?

Good and Services

The objects (goods) and the actions (services) that people value and produce to satisfy human wants.

Self-Interest

The choices that are best for the individual who makes them.

Social Interest

The choices that are best for society as a whole.

Globalization

The expansion of international trade and the production of components and services by firms in other countries

The Information Age

The changes that occurred during the last 25 years were based on one major technology: the microprocessor or computer chip. The spin-offs from faster and 56cheaper computing have been widespread in telecommunications, music and movie recording, and the automation of millions of routine tasks that previously required human decision and action.

Climate change

The Earth is getting hotter and the ice at the two poles is melting. Since the late nineteenth century, the Earth’s surface temperature has increased about 1 degree Fahrenheit, and close to a half of that increase occurred over the past 25 years. Most climate scientists believe that the current warming has come at least in part from human economic activity—from self-interested choices—and that, if left unchecked, the warming will bring large future economic costs.

A Social Security time bomb

Every year since 2001, the U.S. government has run a budget deficit. On average, the government has spent $1.8 billion a day more than it has received in taxes. The government’s debt has increased each day by that amount. Over the ten years 2002 through 2011, government debt increased by $6.5 trillion. Your personal share of this debt is $21,600.

1. Economics studies choices that arise from one fact. What is that fact?

1. The fact is scarcity—human wants exceed the resources available.

2. Provide three examples of wants in the United States today that are especially pressing but not satisfied.

2. Security from international terrorism, cleaner air in our cities, better public schools. (You can perhaps think of some more.)

3. In the following three news items, find examples of the what, how, and for whom questions: “With more research, we will cure cancer”; “A good education is the right of every child”; “Congress raises taxes to curb the deficit.”

3. More research is a how question, and a cure for cancer is a what question. Good education is a what question, and every child is a for whom question. Raising taxes is a for whom question.

4. How does a new Starbucks in Beijing, China, influence self-interest and the social interest?

4. Decisions made by Starbucks are in Starbucks’ self-interest but they serve the self-interest of its customers and so contribute to the social interest.

5. How does Facebook influence self-interest and the social interest?

5. Facebook serves the self-interest of its investors, users, and advertisers. It also serves the social interest by enabling people to share information.

Economic Way of Thinking

• A choice is a tradeoff • People make rational choices by comparing benefits and costs. • Benefit is what you gain from something. • Cost is what you must give up to get something. • Most choices are “how much” choices made at the margin. • Choices respond to incentives.

Tradeoff

An exchange—giving up one thing to get something else.

Rational choice

A choice that uses the available resources to best achieve the objective of the person making the choice.

Benefit

The benefit of something is the gain or pleasure that it brings.

Opportunity cost

The opportunity cost of something is the best thing you must give up to get it.

Margin

A choice on the margin is a choice that is made by comparing all the relevant alternatives systematically and incrementally.

Marginal cost

The opportunity cost that arises from a one-unit increase in an activity. The marginal cost of something is what you must give up to get one additional unit of it.

Marginal benefit

The benefit that arises from a one-unit increase in an activity. The marginal benefit of something is measured by what you are willing to give up to get one additional unit of it.

Incentive

A reward or a penalty—a “carrot” or a “stick”—that encourages or discourages an action.

Economic model

A description of some feature of the economic world that includes only those features assumed necessary to explain the observed facts.

Correlation

The tendency for the values of two variables to move together in a predictable and related way.

normative statements

statements about what ought to be.

positive statements

statements about what is.

Every week, Kate plays tennis for two hours, and her grade on each math test is 70 percent. Last week, after playing for two hours, Kate considered playing for another hour. She decided to play for another hour and cut her study time by one hour. But last week, her math grade fell to 60 percent. Use this information to work Problems 1 to 4.


1. What was Kate’s opportunity cost of the third hour of tennis?


2. Given that Kate played the third hour, what can you conclude about her marginal benefit and marginal cost of the second hour of tennis?


3. Was Kate’s decision to play the third hour of tennis rational?


4. Did Kate make her decision on the margin?

1. Kate’s opportunity cost of the third hour of tennis was the drop in her grade of ten percentage points.


2. The marginal benefit from the second hour of tennis must have exceeded the marginal cost of the second hour because Kate chose to play the third hour.


3. If marginal benefit exceeded marginal cost, Kate’s decision was rational.


4. Kate made her decision on the margin because she compared the benefit and cost of one more hour (marginal benefit and marginal cost).

1. Define economics and explain the kinds of questions that economists try to answer.

• Economics is the social science that studies the choices that we make as we cope with scarcity and the incentives that influence and reconcile our choices. • Microeconomics is the study of individual choices and interactions, and macroeconomics is the study of the national economy and global economy. • The first big question of economics is: How do the choices that people make end up determining what, how, and for whom goods and services are produced? • The second big question is: When do choices made in the pursuit of self-interest also promote the social interest?

2. Explain the ideas that define the economic way of thinking.

• Six ideas define the economic way of thinking: 1. A choice is a tradeoff. 2. People make rational choices by comparing benefits and costs. 3. Benefit is what you gain when you get something (measured by what you are willing to give up to get it). 4. Cost is what you must give up to get something. 5. A “how much” choice is made on the margin by comparing marginal benefit and marginal cost. 6. Choices respond to incentives. • Economists use the scientific method to try to understand how the economic world works. They create economic models and test them using natural experiments, statistical investigations, and economic experiments. • Economics is a tool for personal, business, and government decisions.

Scatter diagram

A graph of the value of one variable against the value of another variable.

Time-series graph

A graph that measures time on the x-axis and the variable or variables in which we are interested on the y-axis.

Trend

A general tendency for the value of a variable to rise or fall over time.

Cross-section graph

A graph that shows the values of an economic variable for different groups in a population at a point in time.

Positive relationship or direct relationship

A relationship between two variables that move in the same direction.

Linear relationship

A relationship that graphs as a straight line.

Negative relationship or inverse relationship

A relationship between two variables that move in opposite directions.

Slope

The change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis.