The Principles and Practice of Economics - Chapter 1

A set of vocabulary flashcards covering the fundamental principles, definitions, and concepts from the introductory chapter of the Acemoglu, Laibson, and List economics lecture.

Economics

The study of people’s choices.

Positive Economics

Describes what people actually do; it is descriptive and predictive in nature.

Normative Economics

Describes what people should do; it is prescriptive or judgmental.

Optimization

The first principle of economics, stating that people try to choose the best available option by considering benefits (preferences) and costs (foregone opportunities).

Equilibrium

The second principle of economics, describing a situation in which nobody would benefit by changing his or her own behavior.

Empiricism

The third principle of economics, which involves using data to test theories and determine what is causing things to happen in the real world.

Trade-off

The result of constrained choices where doing more of one thing means foregoing the ability to do something else.

Budget Constraint

A concept that defines the choices that are feasible given a fixed amount of money that can be spent.

Opportunity Cost

The measure of the value of the best alternative foregone, reflecting the benefit given up when choosing one activity over another.

Cost-benefit Analysis

A calculation that compares the benefit of an action with its cost to evaluate if a choice makes a person better off or to select the best choice from a set of options.

Marginal Analysis

A decision-making method used by optimizers that asks, "what is the value of one more…?"

Weighting of Facebook Opportunity Cost

Calculated as $\frac{1}{2} \times \$15 + \frac{1}{2} \times \$1 = \$8$ per hour, based on minimum wages in developed and developing countries.

Total Daily Cost of Facebook (2023)

The product of user time and opportunity cost, calculated as $1.12 \times 10^9 \text{ hours} \times \$8/\text{hour} = \$8.96 \times 10^9$.

Causation

A relationship where one thing causes another to happen, which economists distinguish from simple correlation through empirical analysis.