Economics - Basic Concepts

scarcity

a condition of not being able to have everything we need or want due to limited resources, to be in short supply

• a situation in which a resource has more than one valuable use

• society has a limited capacity to produce goods and services

• may be relative

what is making a choice?

deciding among many possibilities/options

incentive

a reward you wish to receive after making a choice

how do rules, incentives and choices relate?

rules provide the basis and guidelines for incentives and incentives influence choices

trade-off

different poss options that you could choose from in any given choice

opportunity cost

what you are giving up to make the decision you are making → the next best alternative related to your choice

beenfits of goal setting

• setting goals considers the trade-offs & opportunity costs

• helps you visualize your future and compels you to make decisions aimed at attaining your desired future, whether it be short-term or long-term

rationality

• basic assumption in economic analysis is that individuals behave rationally ​

• individuals will behave or take such actions as are necessary to achieve their objectives

ceteris paribus

• "Other Things Being Equal"​

• phrase is used to compensate for the inability to control other variables in the real world ​

• when constructing theories and models, economists assume that other variables are equal or unchanged 

making decisions (economic reasoning)

is an analysis of costs and benefits to make rational choices

• different ppl may make different decisions based on differing values

• based on two economic premises: ppl economize and ppl respond to incentives in predictable ways

• weighing the costs and benefits to each alternative

economics

the study of market systems & how people make choices

• what people buy, produce and how it all works

• economists study the choices individuals make, why they make those choices, and better allocate resouces

capital

the things we use to produce things: physical (factories/tech/machines) and human (professionals/workers)

the problem

individuals are faced with limited resources to satisfy unlimited wants

why choices occur

the tension between limited resources and unlimited wants and needs ​​​

• limited resources for a country are natural resources, capital, labour force and technology​

• with limited resources individuals/countries must make decisions on how to use those resources (what to buy and what to not buy)

utility

• related to the laws of demand and supply ​

• the advantage or fulfillment a person receives from consuming a good/service ​

• abstract concept so the units assigned to an “amount” of utility are arbitrary and relative

total utility

aggregate sum of satisfaction or benefit an individual gains from consuming goods/services

• always increases the more a person consumes

marginal utility

the additional amount of utility gained from each extra unit of consumption

• decreases the more a person consumes

law of diminishing marginal utility​​

• marginal utility decreases with each additional increase in the consumption of a good 

• the consumer doesnt receive the same pleasure from consumption that they received the first time​

• i.e. total utility will increase at a slower pace as a person consumes more of the same product

to determine what a consumer’s utility and total utility are, economists turn to __________________________________

consumer demand theory

demand theory

studies consumer behaviour and satisfaction

opportunity cost …

determined by an individual’s

– needs

– wants

– time

– resources (income)

rule

regulations, laws, guidelines

how are rules and inventives related?

rules are what are required as a base and incentives potentially modify behavior and action

why trade?

trade allows each person to be better off than they would be without the trade in question

are decisions “costless”?

no; all decisions have a cost associated with it and may not be monetary in nature