Chapter 1

Economy definition

a social science that looks at concepts of scarcity and choice.

The study of the way we make decisions about the use of scare resources

Economize

the way we make decisions about the use of scarce resources in regard to how to use our time, energy, money or material for one thing verses another to satisfy current or future needs

Opportunity cost + examples

The idea of the efficient use of resources. Sum of all that is lost from taking one course of action over another. Consider both what you have gained and lost.

ex. choosing between three gifts of all same price with equal desire. choose one, but lose the opportunity to do either of the other two items

Analytical/Positive economics

Deals with facts and direct observations of the world around us. Two types of statements: descriptive and conditional

Normative/Policy statements

Deals with statements that contain value judgements. Cannot be refuted or confirmed, just a matter of opinion based on values

Fallacy

A hypothesis that is proven false but many believe it is true as it seems to make sense at first glance

Fallacy of composition

What benefits an individual will benefit the rest of society

Opposite is also a fallacy: What benefits the whole of society benefits all individuals. Not true, look at free trade. It may lower prices but some people may lose jobs or benefits.

Fallacy of Single Causation

Belief that one person or factor caused a certain event to occur. Ex. the Great depression: the stock market crashing is a factor but not the entire reason why

Post Hoc Fallacy/Cause and effect fallacy

What comes before automatically causes what follows. More coincidence than cause and effect. Event B is caused by Event A.

Ex. The economy improved after the election, but is the election responsible?

Law of increasing relative cost

When a society, in order to get greater amounts of one product, sacrifices an ever-increasing amount of another. Bread vs plough chart. The more you produce something, the more scarce a resource and costs more.

Law of diminishing returns

Relationship between increasing resource used for input (productive resource such as labour) and how it corresponds to a resulting output. When increasing inputs, there will be a maximum output reached.

Law of increased returns to scale

outputs increase by a larger proportion than inputs during production. When all productive resources (inputs) are simultaneously increased, there is a greater increase in outputs. Efficiency. Increased number of workers and land can create an increasing return to scale

Descriptive statements

Type of analytical/positive economics that details things as they are in the present or have been in the past.

Ex. housing stats are 10% higher in this quarter compared to last year

Conditional statements

Another part of analytical/positive economics that forecasts or predicts based on the careful analysis of economic behavior. ‘If X occurs, then y will follow.’ Forecasts can either be confirmed or refuted