Introduction to Economics: Scarcity, Micro vs Macro, and Incentives

This set covers core concepts from the lecture: scarcity, the micro vs macro distinction, the three economic activities, incentives and their types (positive/negative, direct/indirect), unintended consequences, trade-offs, efficiency vs equity, opportunity cost, and common acronyms (FYI, UBI, ex imperi gratia). It also includes examples used in class to illustrate these ideas.

What is scarcity in economics?

The idea that resources are limited or finite, so not all wants can be satisfied.

How do households face scarcity in daily life?

They are constrained by budget and time and must allocate resources to different members and tasks (e.g., who cooks, who goes to work, what gets bought).

What are the three main areas economists study in getting goods to people?

Production, distribution, and consumption.

What is the difference between a planned (committed) economy and a free-market economy?

In planned economies, the government makes decisions about what to produce and who works; in free markets, households and firms decide through private market interactions.

What is microeconomics?

The study of individual units that make up the economy—households, firms, and specific markets.

What is macroeconomics?

The study of the overall workings of an economy, focusing on measures like growth, unemployment, inflation, and price levels.

How is inflation defined?

An overall rise in price levels across the economy, not just a single item, measured with a weighted basket of goods.

What is the difference in scope between microeconomics and macroeconomics?

Micro focuses on individual units and markets; macro looks at the whole economy and broad indicators.

What are the five foundations of economics mentioned in the lecture?

Incentives, trade-offs, opportunity cost, marginal thinking, and trade creates value.

What is an incentive?

Anything that motivates people to act.

What is a positive incentive? Provide an example.

A reward or payment that encourages action (e.g., health insurance coverage, profits, or credit card rewards).

What is a negative incentive? Provide an example.

A punishment or cost that discourages action (e.g., higher prices, fines, or jail).

What is a direct incentive? Provide an example.

A clear motivator aimed at a specific behavior (e.g., weekly allowance to clean a room).

What is an indirect incentive? What is an unintended consequence?

A secondary behavioral change caused by the original incentive, which can lead to unintended consequences (e.g., seat belt laws unintentionally changing driving behavior).

What is a well-known unintended consequence illustrated by seat belt laws?

While designed to reduce injuries, they can lead to riskier driving and other unintended effects like more accidents in some cases.

Why do incentives matter for firms and individuals in the market?

Because people respond to incentives; decisions about work, spending, and production are guided by expected rewards and costs.

What is a trade-off in economics?

Choosing one option requires giving up something else due to scarcity.

What are efficiency and equity in the context of trade-offs?

Efficiency means maximizing total output from scarce resources; equity means how evenly wealth is distributed across society.

What is opportunity cost?

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

What is UBI and what question does it raise about labor participation?

UBI stands for Universal Basic Income; it raises questions about whether it affects people's participation in the labor force.

What does FYI stand for?

For Your Information.

What does exempli gratia (often abbreviated as e.g.) mean?

It is Latin for 'for example'.