Economics 211 Chapter 1

What is economics?

the study of how individuals, firms, and societies make decisions to allocate limited resources

What three things does economics assume?

-People are rational

-People are self-interested

-People respond to incentives

What is Microeconomics (this course?)

the study of decision-making by individuals, businesses, and industries
(buying a starbucks coffee)

What is Macroeconomics?

the study of broader issues in the economy such as inflation, unemployment, and national output
(will college students be able to get jobs?)

What kind of data and models are used during economic analysis?

a model, that is, a simplification of the real world

What is efficiency?

How well resources are used and allocated

What is an example of efficiency?

No one can be made better off without someone else being harmed
(if pay is raised, the customer is worse off)

What is equity?

The fairness of various issues and policies
(should executive salaries and bonuses be capped for publicly traded companies)

What is positive analysis

The use of statements or questions that are based on the understanding of information or facts
(when weather gets colder, demand for ice cream decreases)

What is normative analysis

The use of statements or questions that are based on opinions or societal beliefs on what should or should not take place

(should the minimum wage be raised)

What is the first key principle of economics?

Economics is concerned with making choices with limited resources

What is scarcity?

-Unlimited wants clash with limited resources.

-Everyone faces scarcity

-Economics focuses on the allocation of scarce resources to satisfy unlimited wants as fully as possible

What is the second key principle of economics?

When making decisions, one must take into account tradeoffs and opportunity costs

What is an opportunity cost

The value of the next best alternative of resources. It is what one gives up when choosing an activity or making a purchase

What is the third key principle in economics?

Specialization improves everyone involved

What is an example of specialization?

I benefit from hiring someone to invest my money, they get paid and enjoy it

What is the fourth key principle in economics?

People respond to incentives, both good and bad

What are some examples of incentives?

Go to work = good incentive, money

Place hand on stove = bad incentive, pain

What is the fifth key principle in economics?

Rational behavior requires thinking on the margin

What does thinking on the margin entail?

Why not one more? Why not get another slice of pizza?

What is the sixth key principle in economics?

Markets are generally efficient

What is an example of markets being efficient?

-Resources are allocated where they need to be
-Efficiency of competition: stores offer incentives

What is the seventh key principle of economics

Economics growth, low unemployment, and low inflation are economic goals that do not often occur at the same time

What is the eighth key principle of economics?

Institutions and human creativity help explain the wealth of nations