Economics and Economic Reasoning - Vocabulary Flashcards

Vocabulary flashcards covering key terms from the chapter on Economics and Economic Reasoning.

Economics

The study of how human beings coordinate their wants and desires given the decision-making mechanisms, social customs, and political realities of a society; solves the three central coordination problems: what to produce, how to produce it, and for whom to produce it.

Scarcity

The condition in which individuals want more than can be produced; goods available are too few to satisfy desires; scarcity varies with technology and human action.

Microeconomics

The study of individual choice and how that choice is influenced by economic forces.

Macroeconomics

The study of the economy as a whole.

Coordination problems (What to produce, How to produce, For whom to produce)

The three central questions an economy must decide how to address.

Marginal Cost

The additional cost incurred to produce one more unit of a good or service.

Marginal Benefit

The additional benefit received from producing or consuming one more unit.

Economic Decision Rule

If MB > MC, do it; if MC > MB, don’t do it.

Opportunity Cost

The benefit you could have gained from the next-best alternative; should be less than the benefit of the chosen option; core idea behind cost/benefit reasoning.

Implicit costs

Costs associated with a decision that are not included in normal accounting costs.

Illusionary sunk costs

Costs that appear in financial accounts and have already been spent; should not be included in opportunity costs.

TANSTAAFL

There ain’t no such thing as a free lunch.

Economic forces

The necessary reactions to scarcity that drive resource allocation.

Market force

An economic force given relatively free rein by society to operate through the market.

Invisible hand

The price mechanism that guides actions in a market, coordinating supply and demand to allocate resources efficiently.

Price mechanism

The process by which prices adjust to balance supply and demand in a market.

Economic institutions

Laws, common practices, and organizations in a society that affect the economy; vary among nations and may differ from theory.

Theory (economic theory)

A general set of explanations and principles that tie together terminology and knowledge about economic institutions.

Economic model

A framework that places the generalized insights of a theory into a specific contextual setting.

Economic principle

A commonly held insight stated as a law or general assumption.

Theorem

A proposition that is logically true based on the assumptions of a model.

Policy precept

Policy rules that conclude a particular course of action is preferable, combining theorems with real-world institutions and value judgments.

Positve economics

The study of what is and how the economy works.

Normative economics

The study of what the goals of the economy should be.

The art of economics

Using knowledge from positive economics to achieve the goals determined in normative economics.

Shortage

When demand exceeds supply; prices tend to rise.

Surplus

When supply exceeds demand; prices tend to fall.