micro unit 2

cost-benefit analysis

The analysis of alternatives that considers the costs and benefits of each alternative. This is usually done in search of the alternative with the highest net benefit.

efficiency

In the context of production, efficiency means producing the maximum amount of goods or services possible, given the resources available.

inefficiency

In the context of production, inefficiency means producing less than the maximum amount of goods or services possible, given the resources available.

law of increasing opportunity costs

The law that says as more and more of a good is produced, the opportunity cost of producing each additional unit of the good increases.

marginal analysis

The study of the effects of an incremental change — one more or one less.

net benefits

Total benefits minus total costs.

normative analysis

Analysis that includes value judgments and suggests a specific action or actions.

opportunity cost

The value of the next best alternative sacrificed when an alternative is chosen.

positive analysis

Analysis that tries to be objective and avoid making value judgments.

production possibilities curve

A curve that shows all the different combinations of two or more goods or services that can be efficiently produced, given the current resource availability and technology.

rational self interest

An individual's wants and desires, which may include the well being of others.

sunk cost

A cost that must be paid regardless of any current decision. Because a sunk cost has to be paid no matter what, it's irrelevant to any current decision.

absolute advantage

Ability to produce a good or service using fewer resources than other producers.

barter

Exchanging goods and services directly for other goods and services.

comparative advantage

Ability to produce a good or service while sacrificing less production of another good or service than other producers.

division of labor

Breaking up the production of a good or service into subdivisions.

law of comparative advantage

The law that says a person or nation benefits when producing those goods and services in which they have a comparative advantage and trading those goods and services for other goods and services.

medium of exchange

Something that people generally accept in exchange for a good or service. Money is an example.

money

Anything that is widely accepted as a medium of exchange for goods and services.

North American Free Trade Agreement (NAFTA)

A trade agreement between Mexico, Canada, and the United States of America that went into effect on January 1, 1994, and eliminated most trade barriers between the three nations.

productive efficiency

A society (or firm) uses its resources in such a way that in order to produce more of one good or service, the society has to produce less of another good or service.

specialization

When an individual spends time on a particular task or tasks, rather than producing all the goods and services they consume.

algebraic model

Simplification that shows the relationship between two or more variables with an equation.

assumption

Something that is taken as or thought to be true.

behavior assumption

An assumption about how people will act. Economists assume that people act to pursue their own self interest.

ceteris paribus

Latin phrase meaning "all other things held constant." A key for successful experimenting is to control all variables, making sure only the ones you're observing change. This controlling of all other variables is called ceteris paribus.

dependent variable

A variable that changes in response to changes in the independent variable.

fallacy of composition

The incorrect belief that what's good or true for an individual is good or true for the group.

fallacy that association is causation

The incorrect belief that because two things happen at about the same time, one caused the other.

faulty ceteris paribus

The incorrect assumption that variables are constant when they aren't.

graphical model

A simplification of the relationship between two or more variables, shown on a graph.

hypothesis

A statement about how two or more variables interact. Making a hypothesis is the first step of the scientific method. To become a theory, the hypothesis must be tested and shown to be true.

independent variable

A variable that causes a dependent variable to change.

law

A theory that's been repeatedly tested and shown to be true. A law is not indisputable; it could conceivably be proven untrue.

law of demand

The law that says the amount people are willing and able to purchase increases when prices decrease, and the amount people are willing and able to purchase decreases when prices increase, ceteris paribus.

mistake of ignoring secondary effects

The mistake of not noting changes in other variables when the variable being studied changes.

mistake of ignoring unaccounted variables

Overlooking changing variables that may be responsible for the change of other variables.

model

The representation of a theory.

numerical model

A simplification showing the relationship between two or more variables using numbers in a table.

Phillips curve

A curve that shows the short-run negative (or inverse) relationship between unemployment and inflation.

random measurement error

Differences in measurements that occur when measuring the same object more than once.

sample selection bias

When a smaller sub-section of a group is used to represent the group as a whole for statistical purposes, but doesn't share the characteristics of the group as a whole.

scientific method

A four-step process used by all scientists (including economists, who are social scientists). The four steps are identifying and defining the key variables, specifying assumptions, developing a hypothesis, and testing the hypothesis.

secondary effects

The effects other than the expected primary effects caused by the change of a variable. Secondary effects tend to occur later and with less intensity than primary effects.

social science

Study of people and their behavior.

theory

An explanation of how two or more variables interact. A theory is a hypothesis that's been tested and not rejected. When there is a lot of evidence for a theory, it may be called a law.

verbal model

A verbal simplification explaining the relationship between two or more variables.