Ch 1: The Nature of Economics

Twenty vocabulary flashcards covering fundamental terms from Chapter 1 of Economics Today, Twentieth Edition.

Economics

The study of how people allocate limited resources to satisfy unlimited wants; the analysis of choice-making.

Microeconomics

The branch of economics that examines decision making by individual households and firms, focusing on specific markets.

Macroeconomics

The branch of economics that studies the economy as a whole, dealing with aggregates like national output, unemployment, and inflation.

Incentives

Rewards or penalties that motivate people to engage in particular activities, forming the starting point for economic analysis.

Resources

Items of value used to produce goods and services that satisfy people’s wants; they are always limited.

Wants

The goods and services people would buy if their incomes were unlimited.

Economic System

The institutional mechanism a society uses to determine how scarce resources are utilized to satisfy human wants.

Centralized Command and Control

An economic system in which a central authority makes all economic decisions (also called central planning).

Price System

A decentralized market system in which prices act as signals that guide individuals’ and firms’ economic decisions.

Mixed Economic System

A system that blends elements of centralized command with a decentralized price mechanism, characteristic of most nations.

Rationality Assumption

The idea that individuals do not intentionally make decisions that leave them worse off; they act in their perceived self-interest.

Positive Incentive

A benefit or reward that encourages a particular action (e.g., gold stars for students, higher wages).

Negative Incentive

A penalty or punishment that discourages a particular action (e.g., fines, overdraft fees).

Self-Interest

The pursuit of one’s own goals—such as wealth, prestige, friendship, or love—guiding economic choice without necessarily implying selfishness.

Economic Model

A simplified representation of reality used to explain and predict economic phenomena, focusing only on essential relationships.

Ceteris Paribus

A Latin phrase meaning “other things equal”; the assumption that all variables except those under study remain unchanged.

Empirical Science

A discipline that tests theories using real-world data; economics relies on empirical evidence to evaluate models.

Positive Economics

The area of economics concerned with descriptive statements and scientific predictions about what is (e.g., “If A, then B”).

Normative Economics

The area of economics that involves value judgments about what ought to be, addressing questions of good or bad outcomes.

Bounded Rationality

The hypothesis that people are nearly—but not fully—rational, using rules of thumb and facing limits on information, selfishness, and willpower.