Economic Tools

Economics

The social science that studies choices that individuals, businesses, and governments make as they cope with scarcity.

Scarcity

The inability to get everything we want; unlimited wants and limited resources.

Incentive

A reward or a penalty that encourages action.

Economy

The social mechanism that coordinates choices and allocates scarce resources to their alternative uses.

Market Economy

Uses markets and prices to coordinate choices and allocate resources.

Centrally Planned Economy

Government regulators allocate most of the resources.

Why do prices exist?

Because of scarcity.

Why can't we avoid making choices?

We don't have enough time to do all the things we want to do, which forces us to prioritize and make decisions based on available resources.

Economic model

A description of some economic phenomenon that includes only features assumed necessary to answer a question about observed facts; often mathematical and graph-based.

Natural experiment

An event that arises in the ordinary course of economic life when two situations differ by the one thing that we want to test.

Correlation

A tendency for the values of two variables to move together.

Laboratory experiment

Puts people in a decision-making situation and varies the influence of one factor at a time to discover how they respond to changed incentives.

Normative disagreements

Disagreements that can't be settled by facts; arise from opinions and beliefs.

Positive disagreements

Disagreements that can be settled by facts.

Scatter diagram

A graph of the values of one variable against the values of another variable.

Time-series graph

Measures time on the x-axis.

Cross-section graph

Shows the values of an economic variable for different categories or groups in a population.

Trend

The tendency for the value of a variable to rise or fall.

Marginal analysis

Choices made on the margin; some adjustment is made to the existing situation.