econ 2020 chapter 1 vocab

optimization

making the best choice possible with the given information

equilibrium

when everyone is optimizing; no one would be better off with a different choice

• markets have no mechanism for “fair”

empiricism

using data to figure out answers to interesting questions

• testing ideas with data

• doesn’t always work

budget constraint

things you can buy (or do) within your budget

• money

• time

• what economists use to describe trade-offs

What is Economics?

The studying of human behavior

• studies how agents (people or groups) make choices among scarce resources and how those choices affect society

scarce resource

things people want, where folks want more than is available

scarcity

the situation of having unlimited wants in a world of limited resources

Microeconomics

how and why individuals, firms, and governments make choices

Macroeconomics

The whole economy

What do Economists study?

anything that involves individuals making decisions

Economic analysis

helpful individual economic agents choose what is in their personal best interest

Trade-offs

decreasing your budget for one item so you can better afford another one

cost-benefit analysis

comparing a set of feasible alternatives and picking the best one

• an optimization process

Labor-force participation rate

defined by the Bureau of Labor Statistics as the number of people in the labor force as a percentage of the working-age population

Opportunity Cost

a measure of what is given up when you do that activity

why does free-riding occur

people sometimes pursue their own private interests and don’t contribute voluntarily to the public interest

In equilibrium…

everybody is simultaneously optimizing and no one believes that he or she would benefit from changing their behavior

Prescriptive economics

helping economic agents make decisions that are in their best interest

• ex: using a street light on the road or the use of public parks by locals

Models in Economics

• all are bad, some are useful

• ex: map is a model for the Earth

Causation and Correlation

Why do variables move together?

• one drives the other

• third variable drives both

• one drives the other, but we have it flipped

• they are truly unrelated, but flukes happen

Causation

One variable drives the other

Omitted variable

both variables driven by a third variable

randomized control trials

subjects that are randomly put into treatment (something happens) and control (nothing happens) groups by the researcher

Natural trials

subjects end up in treatment or control groups due to something that is not purposefully determined by the researcher

scientific method

the ongoing process that economists, other social scientists, and natural scientists use to:

• develop models of the world

• evaluate those models by testing them with data

checked with empirical data

empirical evidence

facts that are obtained through observation and measurement/data

hypotheses

a models predictions

median

the “middle” value of a group of numbers

• calculated by ordering numbers from least to greatest and finding the value halfway through the list

mean/average

the sum of all the different values divided by the number of values

causation

when one thing directly affects another

variable

a changing factor or characteristic

correlation

two variables tend to move at the same time - as one changes, the other changes as well

positive correlation

two variables tend to move in the same direction

negative correlation

the two variables are not related

zero correlation

when two variables are not related

reverse causality

occurs when we mix up the direction of cause and effect

experiment

a controlled method of investigating causal relationships among variables

randomization

the assignments of subjects by chance, rather than by choice, to the treatment group or to the control group

natural experiment

an empirical study in which some process - out of the control of the experiment - has assigned subjects to control and treatment groups in a random or nearly random way