Economics Unit 1 Review Flashcards

economics

the study of how people choose to use their limited resources to satisfy their unlimited wants; the science of decision making

limited resources (ex.)

time and money

fundamental economic problem + its definition

scarcity; the condition in which our wants are greater than the resources available to satisfy them. scarcity forces individuals to choose between their wants

positive economics

theory; describes how things are and why, and involves analyzing how economics works

normative economics

action; determines the best choice based on specific conditions, it can involve making policy recommendations

no free lunch principle

the lunch was free for you, but someone else had to pay for it behind the scenes to make up the cost

costs and benefits

costs: negatives, what you lose from choosing a path

benefits: positives, what you gain from choosing a path

when do people choose something?

when the benefits outweigh the costs

thinking at the margin principle

the idea that most choices involve thinking in terms of a little (marginally) more or less, instead of all or nothing.

marginal cost/benefit

marginal cost: what you lose to have one more unit of something

marginal benefit: what you gain to have one more unit of something

incentives matter

people don’t do things unless there is an incentive to doing it (costs and benefits)

incentive

something used to motivate people to choose something or go down a certain path

positive/negative incentives

positive incentives: something that encourages a certain behavior

negative incentive: something that discourages a certain behavior

law of unintended consequences

each action made by a person or government has effects that were not intentional

future consequences count principle

most decisions are made after consulting short-term consequences, however most decisions also have long-term effects

trade makes people better off principle

people only trade if the exchange is mutually beneficial, therefore both parties are satisfied

trade

the voluntary exchange of goods and services

who is the father of economics and what influential book did he write

adam smith, the wealth of nations, 1776

specialization

doing one job or task very well

division of labor

splitting the production process into specialized groups to increase productivity and quality

why does specialization encourage trade?

specialization ensures that each person only produces one thing, and therefore relies on other people to create items within their own specialty, encouraging trade

how does trade promote wealth?

gets goods to those who value them, increases quality and quantity of items, lowers the cost of goods

standard of living

the degree of wealth and material comforts available to individuals or communities

markets coordinate trade principle

markets usually do better than anybody else at coordinating exchanges between buyers and sellers

market

any arrangement that brings together a buyer and a seller

invisible hand metaphor

an individual’s pursuit of economic self interest can promote the well being of society. governments should, for the most part, leave the economy alone (unless economies are too slow to adjust to changing conditions)

rational behavior model

people behave rationally (predictably) by making self interest decisions that they think will fulfill their wants and needs to the greatest extent possible