EC 202 Macroeconomics Unit 1 - Thinking like an Economist

How is saving defined in economics?

In economics, saving is defined as using your money in a way that gives you a return, including putting it in a bank account or into stocks and bonds.

What is the economic definition of investing?

Investing is defined as the purchase of goods used for future productivity.

How is an economy defined?

An economy is defined as a system of interactions.

What is economics?

Economics is the study of the allocation of scarce resources to meet human needs and objectives.

What is meant by a scarce resource?

A scarce resource is one that there is a limited amount of, such as labor or water.

Define opportunity cost.

Opportunity cost is what you give up in order to have something, and it results in tradeoffs.

What are time costs?

Time costs are the costs associated with the time almost anything takes, making almost everything costly in some way.

Define tradeoffs.

Tradeoffs can be defined as what you give up in order to gain some other good or service.

Explain the 'Guns vs. Butter' concept in economics.

The Guns vs. Butter concept describes tradeoffs where the government must decide between military spending (guns) and societal goods (butter). Growing the military requires raising taxes, which can demotivate production and reduce the availability of 'butter' in society, illustrating a trade-off.

What do firms aim to maximize in economics?

Firms will maximize profits.

What do households aim to maximize in economics?

Households will maximize utility, which includes goals not only related to money but also leisure, health, and family outcomes.

What does economics assume about decision-making?

Economics assumes that everyone makes decisions rationally.

What are the three qualities of rational decision-making in economics?

Rational decision-making in economics must have three qualities:

1. They must be profit maximizing (meaning choices make people the most happy).
2. They must be made marginally (decisions are not all-or-nothing but involve incremental choices).
3. They must ignore sunk costs (costs already paid should not influence future decisions).

Where does rational decision-making always occur?

Rational decision-making always occurs at the margin by considering the cost or benefit of adding one more unit.

How do incentives work in economics?

Incentives change costs or benefits by offering punishment or reward. They work because people are rational, and incentives should always align with desired outcomes.

What are sunk costs?

Sunk costs are costs already paid that should not factor into future decisions.

List the main principles of economics related to how people make decisions.

The principles related to how people make decisions are:

• People face tradeoffs.
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.

List the main principles of economics related to how people interact.

The principles related to how people interact are:

• Trade can make everyone better off.
• Markets (where people interact to exchange goods and services) are usually a good way to organize economic activity.
• Governments can sometimes improve market outcomes.

List the main principles of economics related to how the economy works.

The principles related to how the economy works are:

• A country’s standard of living depends on its ability to produce goods and services.
• Prices rise when the government prints too much money.
• Society faces a short-run tradeoff between inflation and unemployment.