ECON CHAP 1

What is economics?

Economics is the study of how people manage resources.

What are economic agents?

Economic agents are individuals, groups, firms, governments, and other organizations that make decisions about how to manage resources.

What is a resource?

A resource is anything that can be used to make something of value.

What are physical resources?

Physical resources include things such as land, machinery, and workers.

What are intangible resources?

Intangible resources include things such as time, ideas, technology, job experience, and personal relationships.

What is microeconomics?

Microeconomics is the study of how individuals, firms, governments, and other organizations manage resources.

What is macroeconomics?

Macroeconomics is the study of the economy on a regional, national, or international scale.

How are microeconomics and macroeconomics related?

They are interdependent fields of economics.

What is rational behaviour?

Rational behaviour occurs when people make choices intended to achieve their goals as effectively as possible.

What does rational decision making involve?

It involves comparing choices and choosing in a way intended to achieve one's goals as effectively as possible.

Are people always perfectly rational?

No. Behaviour is not always rational, but assuming rational behaviour is useful for understanding and predicting much of the world.

What are predictable irrational behaviours identified in the chapter?

Short-sightedness and being affected by how a choice is presented.

What is short-sightedness?

A predictable form of irrational behaviour in which people place too much weight on immediate outcomes relative to future outcomes.

What is the effect of how a choice is presented?

People can be influenced by the way a choice is framed or presented, even when the underlying options are the same.

What are the four key questions of economic problem-solving?

1. What are the wants and constraints of those involved? 2. What are the trade-offs? 3. How will others respond? 4. Are resources being allocated in the best way possible?

Which economic concept is associated with wants and constraints?

Scarcity.

Which economic concepts are associated with trade-offs?

Opportunity cost and marginal decision making.

Which economic concept is associated with how others respond?

Incentives.

Which economic concept is associated with whether resources are allocated in the best way possible?

Efficiency.

What is scarcity?

Scarcity is the condition of wanting more than we can get with available resources.

Why does scarcity exist?

People have wants and desires, but the resources available to satisfy those wants are limited.

How does scarcity affect choices?

Scarcity means people have a limited range of possibilities and therefore must make choices.

What does it mean to be constrained by resources?

It means that limited resources restrict the choices available to a person or organization.

Why is scarcity a fundamental economic problem?

Because wants exceed the resources available to satisfy them, choices and resource allocation are unavoidable.

What are objectives?

Objectives are the things that an individual or organization wants to achieve.

What are constraints?

Constraints are limitations that restrict the choices available for achieving an objective.

What is a trade-off?

A trade-off is the need to balance competing costs and benefits when choosing among alternatives.

Why do all decisions involve trade-offs?

Because choosing one alternative means giving up the opportunity to use resources for another alternative.

What should be considered when evaluating a trade-off?

The costs and benefits of the alternatives being considered.

When does rational decision making favour an action?

When the benefit of the action is greater than its cost.

What is a direct cost?

A direct cost is an immediately observable or explicit cost associated with a choice.

What is opportunity cost?

Opportunity cost is the true cost of a choice, measured by the value of what must be given up.

What is the formal definition of opportunity cost?

The value of the next-best alternative to a choice.

What is the next-best alternative?

The most valuable alternative that is given up when a particular choice is made.

Why is opportunity cost considered the true cost of a choice?

Because it includes the value of the opportunity that must be sacrificed to make the choice.

Does opportunity cost include only monetary costs?

No. It can include the value of time, income, experiences, or other alternatives that are given up.

Can opportunity cost differ between people making the same choice?

Yes. Opportunity cost depends on the value of the alternatives available to the particular decision maker.

What is marginal decision making?

Marginal decision making involves comparing additional benefits with additional costs when deciding whether to do more of something.

What does "marginal" mean in economics?

Marginal means additional or incremental.

What does marginal decision making compare?

It compares the additional benefit of an action with its additional cost.

What costs and benefits should be considered in a marginal decision?

Only the additional costs and additional benefits relevant to the decision should be considered.

Why should past costs and benefits generally be excluded from a marginal decision?

Because they result from choices that have already been made and cannot be changed by the current decision.

What is a sunk cost?

A sunk cost is a cost that has already been paid and should rationally not be used to make current decisions.

How should sunk costs affect current marginal decisions?

They should have no bearing on the marginal decision about what to do next.

Does opportunity cost include sunk costs?

No. Opportunity cost does not include sunk costs.

What is the relationship between opportunity cost and marginal decision making?

Opportunity cost identifies what is sacrificed by a choice, while marginal decision making compares the additional costs and benefits of doing more.

What is an incentive?

An incentive is something that causes people to behave in a certain way by affecting the trade-offs they face.

What is a positive incentive?

A positive incentive makes people more likely to do something.

What is a negative incentive?

A negative incentive makes people less likely to do something.

What is a disincentive?

A disincentive is a negative incentive that makes people less likely to engage in a behaviour.

How do incentives affect behaviour?

Incentives change the trade-offs people face, which can change their choices and behaviour.

What two assumptions do economists make about incentives?

1. People respond to incentives. 2. Nothing happens in a vacuum.

What does "people respond to incentives" mean?

When the trade-offs people face change, their behaviour may change in response.

What does "nothing happens in a vacuum" mean?

Changes in one decision or market can affect other people, decisions, markets, or outcomes.

Why is understanding incentives important?

It helps economists predict how people will respond to changes.

How can a change in price affect incentives?

A price change alters the trade-offs and opportunity costs associated with a choice, which can change behaviour.

How can a tax affect incentives?

A tax changes the trade-offs associated with an activity and generally creates an incentive to consume or produce less of the taxed good or service.

Why should economists consider how others will respond to a decision?

Because changes in prices, policies, or other conditions can create responses and side effects beyond the immediate effect.

What does it mean to consider the unintended effects of a change?

It means considering behavioural responses and consequences that were not necessarily intended by the person or policymaker making the change.

Why can incentives be used to design policies?

Because changing incentives can encourage or discourage particular behaviours.

What is collateral?

Collateral is a possession pledged by a borrower to a lender as security for a loan.

What happens to collateral if a loan is not repaid?

The lender can take the collateral.

How does collateral create an incentive to repay?

The possibility of losing a valuable asset creates a disincentive to default on the loan.

What is group responsibility as an incentive?

Group responsibility creates an incentive for individuals to fulfil their obligations because one person's behaviour can affect the opportunities of other group members.

Why can group responsibility increase repayment incentives?

An individual's failure can impose costs on other members of the group, creating pressure to fulfil the obligation.

What is efficiency?

Efficiency is a situation in which resources are used in the most productive way possible to produce goods and services with the greatest total economic value to society.

What does increasing efficiency mean?

Finding a way to use resources better to produce the things people want.

What does efficiency concern?

It concerns whether scarce resources are allocated toward their most productive and valuable uses.

What do economists generally assume about the behaviour of individuals and firms when discussing efficiency?

They generally assume that individuals and firms behave rationally and seek opportunities to achieve their objectives.

What is the final assumption about individuals and firms in the chapter?

Under normal circumstances, individuals and firms will act to provide the things people want.

What happens if a genuine profit-making opportunity exists under the chapter's efficiency assumption?

Someone will take advantage of it under normal circumstances.

Why does an apparently unexploited opportunity raise an efficiency question?

If resources are already efficiently allocated, a valuable unexploited opportunity requires an explanation.

How is value defined in the chapter's simple approach?

Something is considered valuable if someone wants it.

How can someone demonstrate that they want something?

By being willing to pay for it.

What is a resource in the context of efficiency?

Anything that can be used to make something of value.

What are the four reasons an opportunity may not have been taken advantage of?

Innovation, market failure, intervention, and goals other than profit.

What is innovation as a reason an opportunity may not have been exploited?

The opportunity is genuinely new, so it did not previously exist or could not previously be pursued.

What is market failure?

Market failure occurs when something imposes additional costs or prevents people from taking advantage of an opportunity through the market.

How can market structure contribute to market failure?

A market can be dominated or controlled by a small number of firms, preventing others from taking advantage of opportunities.

What is intervention?

Intervention occurs when the government intervenes in a market, often to prevent harms or change incentives.

What are intentional effects of government intervention?

Effects that policymakers deliberately seek to produce.

What are unintentional effects of government intervention?

Effects that occur as side effects of an intervention rather than as its intended outcome.

Can government intervention sacrifice efficiency?

Yes. Intervention can sometimes sacrifice efficiency in pursuit of other objectives.

When can government intervention be needed for efficiency?

It can be needed to offset or correct a market failure.

What are goals other than profit?

They are objectives pursued by individuals or organizations that are not primarily about generating profit.

Why can goals other than profit explain an unexploited opportunity?

If an individual or organization does not seek profit, it may rationally choose not to pursue a profitable opportunity.

What is economic analysis?

Economic analysis combines theory with observations and subjects both to careful scrutiny before drawing conclusions.

What are the three main elements of the economist's problem-solving toolbox?

Distinguishing correlation from causation, building models, and distinguishing positive from normative analysis.

What is correlation?

Correlation is a relationship in which two events or variables occur together or move together.

What is positive correlation?

Positive correlation occurs when two events or variables occur together or move in the same direction.

What is negative correlation?

Negative correlation occurs when one event or variable increases while a related event or variable decreases.

What does it mean for two variables to be uncorrelated?

It means there is no consistent relationship between the two variables.

What is causation?

Causation means that one event brings about another.

Does correlation imply causation?

No. Correlation does not necessarily mean that one variable causes the other.

What does "correlation is not causation" mean?

It means that observing two variables moving together is not sufficient to conclude that one causes the other.

What are the three major ways correlation and causation can be confused?

Correlation without causation, omitted variables, and reverse causation.

What is correlation without causation?

It occurs when two variables move together but there is no causal relationship between them.

What is an omitted variable?

An omitted variable is a third factor that affects the variables being studied but is left out of the analysis.

How can an omitted variable create a misleading correlation?

The omitted variable can cause changes in both observed variables, making them appear causally related.

What is reverse causation?

Reverse causation occurs when the direction of causation is opposite to what is assumed.