Economics Section I Review

Which 1776 work outlined modern economic analysis?

"An Inquiry into the Nature and Causes of the Wealth of Nations"

Who wrote "An Inquiry into the Nature and Causes of the Wealth of Nations"?

Adam Smith

Which ancient philosopher discussed topics relevant to economics?

Aristotle

What is economics?

The study of how individuals make choices about how to allocate scarce resources in order to satisfy virtually unlimited human wants and about how individuals interact with one another.

What analogy does Adam Smith utilize to describe how economics are driven by self-benefitting decisions?

By stating that it is not from the benevolence of the butcher, brewer, or baker that gives us our dinner, but rather their self-love

How much items does the average supermarket contain?

31,530

What do economists base a majority of their work on?

Five basic assumptions

What are the five basic assumptions of economics?

Scarcity, trade-offs, opportunity cost, rationality, and gains from trade

True or false: scarcity is an inescapable fact of human existence.

True

What is one aspect of humanity that is not scarce?

Desires

What does the existence of scarcity imply?

That every choice we make requires us to give up something else

What are trade-offs?

The choices that require us to give up something else

What is an opportunity cost?

The cost of what you have to give up to get something else

IMPORTANT NOTE ABOUT OPPORTUNITY COST:

They are not necessarily the same as the monetary price you pay

What is the biggest cost of attending college for most people?

The value of their time

What is rationality?

The assumption that people make choices by comparing the benefits of each action with the opportunity cost of that action, and then select the greatest benefit

What does economics assume people perform before they make a purchae?

A cost-benefit analysis

How can trade with other people make them better off?

By specializing in the things that we like and do the best

Under what conditions can gains from trade be achieved?

When it is voluntary

What does economic analysis rely on?

Careful observation, description, measurement, and theory

What are the most common models in economics?

Diagrams or mathematical formulas

How does the simplicity of economic models aid our understanding?

By capturing aspects of reality and allowing us to identify what assumptions/characteristics are important

What is positive economics?

A mode of economic analysis where value-free judgements are made by describing and explaining economic phenomena and to make predictions about what will happen under particular circumstances

What does positive economics focus on?

Identifying cause-and-effect relationships and measuring their size

What is normative economics?

A mode of economic analysis where value judgements are used to guide decisions about what should be as opposed to what is

What mode of economic analysis are cost-benefit comparisons?

Normative economics

What is Pareto efficiency?

A criterion of economics where there is no way to improve one person's well-being without reducing the well-being of someone else

Who created Pareto efficiency?

Italian economist Vilfredo Pareto

What are the two broad subfields of economics?

Microeconomics and macroeconomics

What does microeconomics concentrate on?

Individual behavior and the operation of particular markets

What does macroeconomics concentrate on?

The overall performance of the national economy

How are macroeconomics and microeconomics similar?

They share the same assumptions about human behavior

How does macroeconomics and microeconomics differ?

They focus on economic activity on different scales