Midterm 1 Flashcards

economics

________ study all human behavior, as the outcome of choices people make

choice

_______, not money, is the unifying theme in all things economist study

life

almost all areas of ____ are covered by economics

among scarce resources

economics studies how agents make choices ______________ and how those choices affect society

scarcity

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

scare resources

resources are scarce when the quantity that people want exceeds the quantity that is available

positive economics

describes what people actually do, or makes predicitions about the world that can be verified with data

normative economics

recommends what an individual or society ought to do. it depends on subjective judgements.

microeconomics

the study of individuals, firms, government

macroeconomics

the study of the whole economy

Optimization, Equilibrium, and Empiricism

What are the three pricniples of economic anaylsis?

Optimizing

involves making tradeoffs

tradeoffs

arise when some benefits must be given up in order to gain others

budget constraints

economist use ___________ to describe tradeoffs

opportunity cost

is the best alternative use of a resource

time

opportunity cost applies to all resources, not just ____

Optimization

_________ requires that you take into account the opportunity cost of the activities you are doing.

cost-benefit anaylsis

a calculation that considers the cost and benefits of a given activity using a common unit of measurement, like dollars

net benefit

benefit - cost (including opportunity cost) = _________

we have limited information, sorting through information can be time consuming, and inexperience

Why is it sometimes difficult to make choices?

optimization in levels and optimization in differences

What are the two types of optimization?

optimization in levels

looks at the net benefit = total benefit - total cost

optimization in differences

looks at the change in the net benefit of one option compared to another

Optimization in Levels Steps

1. Express all costs and benefits in the same unit

2. Calculate total net benefits (benefits - cost) for each option

3. Choose the option with the highest net benefit

Optimization in Differences Steps

1. Express all costs and benefits in the same unit

2. calculate how the costs and benefits change as you move from one option to another

3. apply the principle of optimization at the margin: of an option is the best choice, you will be made better off as you move toward it, and worse off as you move away from it

marginal cost

is the change in the cost generated by moving from one feasible alternative to the next feasible alternative

equilibrium

a situation in which everyone is optimizing, so no one percieves that they can benefit by unilaterally changing his/her own behavior

scientific method/empiricism

1. Developing models that explain some part of the world

2. Testing those models using data to see how closely the model matches what we actually observe

model

A ______ is a simplified description of the world (theory)

maps

models are like _____, using visual methods, they simplify the process and facilitate the understanding of complex concepts

causation

when one thing directly affects another through a cause-and-effect relationship

correlation

when two things are correlated, there is a mutual relationship between them

positive correlation

they both change in the same direction

negative correlation

they change in opposite directions

does not

causation does or does not imply causation

omitted variables and reverse causality

correlation is different from causation because of __________

omitted variable

if we ignore something that contributes to cause and effect

reverse causality

there is cause and effect, but it goes in the opposite direction

experiments

a method of investigating causaul relationships among variables

controlled experiment (randomized control trials)

subjects are randomly put into treatment and control groups by the researcher

natural experiments

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

market

a group of economic agents who are trading a good or service, and the rules and arrangements for trading

market price

the price at which buyers and sellers conduct transactions

all sellers sell an identical good or service, numerous buyers and sellers with equally small market power, and the buyers and sellers are price takers

what are the characteristics of a perfectly competitive market?

quantity demanded

the amout of a good that buyers are willing to purchase at a given price

demand schedule

a table that reports the quantity demanded at different prices, holding all else equal

demand curve

plots the quantity demanded at different prices

law of demand

the quantity of a good demanded decreases when the price of this good increases

willingness to pay

the maximum price that the buyer is willing to pay for an additional unit of the good

diminishing marginal benefit

as you consume more of a good, your willingness to pay for an additional unit declines

market demand curve

the sum of the individual demand curves of all the potential buyers, plots the aggregate quantity of a good that consumers are willing to buy at different prices, holding all else equal

ceteris paribus

holding all other factors constant

along the demand curve

changes in JUST price generate a movement _____________

other than the own price change

the demand curve shifts when factors ______________

right/out

if the change increases the willingness of consumers to acquire the good, the demand curve shifts _______

left/in

if the change decreases the willigness of consumers to acquire the good, the demand curve shifts ________