12 Foundations of Economics – Tastes, Incentives, Margins, and Science

A set of Question-and-Answer flashcards covering key concepts from foundations 9–12: subjective tastes, incentives and margins, unintended consequences, and the nature of economics as a science with positive vs normative statements and common logical fallacies.

What does it mean that tastes and preferences are subjective in economics?

They are in individuals' heads, not objective features of reality; there are no universal objective measures to assess how good or bad a taste is.

What is a key implication of taste subjectivity for economists when judging others' preferences?

Economists refrain from second-guessing others' tastes as long as those tastes do not affect or harm others.

How does the tobacco example illustrate economists' view on adult choices?

An adult choosing to smoke is viewed as a rational decision given costs and benefits; judgment would come only if it harms others (e.g., second-hand smoke).

What does 'decisions are made at the margin' mean in economics?

Most choices involve small, incremental trade-offs ('one more' of something) rather than all-or-nothing decisions.

What is the Diamond-Water Paradox and how was it resolved?

Diamonds fetch high prices despite water being essential; resolved by the marginal revolution: value depends on marginal utility and scarcity; water is abundant, diamonds scarce, so prices reflect marginal usefulness.

What is the concept of 'unintended consequences'?

Actions often have outcomes not intended by the actor due to complex interconnections; economists analyze ripple effects over time and across people.

What does the 1989 United Airlines flight example illustrate?

A well-intentioned policy requiring every passenger to have a seat could raise overall fatalities by causing more driving; demonstrates unintended consequences of policy.

What is the difference between 'positive' and 'normative' statements in economics?

Positive statements are factual claims that can be tested; normative statements express value judgments about what should be.

What is the 'naturalistic fallacy'?

Concluding something should be the case simply because it is natural or has existed; 'is' does not imply 'ought'.

What is the 'ad hominem' fallacy?

Judging an argument based on the identity of the person making it rather than the argument's merits.

What is the 'post hoc ergo propter hoc' fallacy?

Concluding that A caused B just because A happened before B, without evidence of causation.

What is the 'fallacy of composition'?

Assuming what is true for a part of a whole is true for the whole; e.g., if some people standing up gives a better view, everyone standing up would too, which is false.

What is the role of science in economics as described in the lecture?

Economics is a science (a social science) using positive statements; it is an organized search for understanding and remains open to revision and comparison with observed outcomes.