Chapter 1 - Intro to Economics

Economics

Is about making choices. It studies how individuals, firms, and societies make decisions to maximize their well-being, given limited resources. Economics encompasses many aspects of life, including what you choose to eat and what career you pursue.

Microeconomics

Studies the behavior of individual economic actors such as people or firms. It deals with issues like what to buy, which job to take, and what to produce. It also looks at how markets are structured.

Macroeconomics

Focuses on the broader economy as a whole, looking at issues like inflation, unemployment, and economic growth. It uses microeconomic tools but focuses on aggregate variables of the economy.

Economic models

They simplify information to its basic relevant elements and use assumptions to develop testable theories (through Ceretis Paribus) Models aim to identify relationships between variables to explain and predict why events occur.

Ceretis Paribus

Latin phrase meaning "holding all other things equal". It is an assumption used in model building to isolate the effect of one variable on another.

Markets are generally ____

Efficient. Private markets and the incentives they provide are the best way to provide goods and services. Markets are driven and disciplined by prices and profit

Equity

Is about fairness in how resources are allocated.

Efficiency

Is about how well resources are used and allocated.

Types of efficiency

Allocative

Pareto

Production

Allocative Efficiency

Occurs when individuals who desire a product the most obtain it.

Pareto Efficiency

Occurs when society improves the well-being of as many individuals as possible without making anyone worse off.

Production Efficiency

Occurs when goods are produced at the lowest cost.

Positive Analysis

Uses statements or questions based on facts and information. They are descriptive and attempt to describe the world as it is.

Normative Analysis

Involves statements or questions that incorporate opinions or societal beliefs about what should be or ought to be. They are prescriptive and attempt to describe the world as it should be.

People respond to _____

Incentives. Individuals and firms act on incentives that drive their choices. Incentives can be designed to encourage specific behaviors.

Marginal

Refers to one additional.

Rational behavior and thinking on the margin

Rational people make decisions by comparing the marginal benefits and marginal costs of an action.

Invisible hand

Through individual self-interest and freedom of production and consumption, the best interests of society, as a whole, are fulfilled

Opportunity Cost

is the value of the next best alternative given up when a decision is made.

Scarcity

is the fundamental problem in economics, referring to the fact that people must make choices due to limited resources. All resources are limited.