ECON 102 Chapters 1, 2 & 3 Midterm Study Guide

Vocabulary-style flashcards covering the foundational principles of economics, economic modeling, and optimization techniques from Chapters 1, 2, and 3.

Economics

The study of how individuals and societies make choices under scarcity and what the outcomes of those choices are.

Scarcity

A condition that exists because resources are limited while wants are unlimited.

Positive Economics

A branch of economics that describes what is and what can be tested using data.

Normative Economics

A branch of economics involving value judgments about what ought to be.

Microeconomics

The study of individual decision-makers and markets.

Macroeconomics

The study of the economy as a whole, including inflation, unemployment, and $GDP$.

Budget Constraint

A representation showing the combinations of goods and services that are affordable given income and prices.

Opportunity Cost

The value of the next best alternative forgone when a choice is made.

Cost–Benefit Analysis

A process that converts all costs and benefits into a common unit, usually dollars, to identify the option with the highest net benefit.

Optimization

The process of choosing the best feasible option given available information and constraints.

Equilibrium

A situation where everybody is optimizing given their information and resource constraints, resulting in a state where no one benefits by changing their behavior.

Empiricism

The practice of using data to determine whether theories about human behavior, decision making, and outcomes match their actual counterparts.

Scientific Method

The process of building models, making predictions, collecting data, testing those predictions, and revising models when evidence contradicts them.

Economic Models

Simplified versions of reality using assumptions that allow economists to focus on key relationships.

Correlation

The relationship between two variables when they move together; it does not necessarily imply causation.

Causation

A relationship where one variable directly affects another.

Omitted Variable

A missing factor that affects both variables being studied, which can potentially create misleading correlation or bias.

Total Value Optimization

A method that compares total costs and total benefits across different alternatives.

Marginal Analysis

The evaluation of small changes by comparing marginal benefit and marginal cost.

Principle of Optimization at the Margin

The rule that if you are not at the optimal choice, small steps toward it increase well-being while small steps away from it decrease well-being.

Common Unit Requirement

The necessity for all costs to be expressed in the same unit, such as dollars or time, before alternatives can be accurately compared.