Chapter 1 Foundations of Economics

Flashcards covering key foundational definitions and concepts of economics, including tradeoffs, marginal analysis, microeconomics, and macroeconomics.

How is economics defined in Chapter 1?

The social science that studies how people make decisions in the face of scarcity and the resulting impact of such decisions on both society as a whole and the individual members therein.

What is scarcity?

A universal phenomenon that arises because resources are limited.

What is the concept of tradeoffs?

The recognition that in many situations acquiring more of one thing can often only be done at the expense of getting by with less of something else.

How is microeconomics defined?

The study of how individual decision maker behave and interact with each other, often with a focus on how households and firms behave and interact with each other in markets.

What is macroeconomics?

The study of the functioning and performance of a society’s economy as a whole, often with a focus on levels of and changes in aggregate measures such as the inflation rate, unemployment rate, and gross domestic product growth rate.

What is a positive statement?

A statement that aims to describe how the world is or actually functions.

What is a normative statement?

A statement that aims to assess the desirability of how the world is or functions, perhaps with suggestions of things that could be done to improve matters.

How is a rational decision maker defined?

Someone with a well-defined goal, who takes actions to achieve the goal as best as possible.

What are total benefits?

The gains that a person realizes from taking an action.

What are total costs?

The burdens that a person incurs from taking an action.

How is total economic surplus defined?

The difference between total benefits and total costs.

What does the Cost-benefit Principle state?

A guide to decision-making which states that an individual should undertake an activity if and only if the additional benefit of doing so is greater than or equal to the additional cost of doing so.

What is marginal benefit?

The change in the value of total benefits as more of an activity is undertaken.

What is marginal cost?

The change in the value of total costs as more of an activity is undertaken.

What does the Incentive Principle state regarding rational decision-maker behavior?

A summary of how behavior of a rational decision maker will change as costs or benefits change: (i) if the marginal benefit of an activity increases, then a rational person will engage in more of the activity, whereas (ii) if the marginal cost of an activity increases, then a rational person will engage in less of the activity.

What is a self-interested individual?

Someone who makes his own personal assessment of the benefits and costs associated with different outcomes, and who subsequently uses these measures as the basis for decision making.