Principles of Economics Practice Flashcards

A comprehensive set of practice flashcards covering the introductory principles of economics, including optimization, equilibrium, empiricism, and cost-benefit analysis.

What is the precise definition of economics according to the text?

Economics is the study of how agents choose to allocate scarce resources and how those choices affect society.

What is an economic agent?

An individual or a group (such as a government, firm, or university) that makes choices.

What are scarce resources?

Things that people want, where the quantity that people want exceeds the quantity that is available.

How is scarcity defined in the context of economics?

The situation of having unlimited wants in a world of limited resources.

What is the difference between positive economics and normative economics?

Positive economics describes what people actually do and is testable with data, while normative economics prescribes what people ought to do and depends on subjective judgments.

What is the focus of microeconomics?

The study of how individuals, households, firms, and governments make choices and how those choices affect prices and the allocation of resources.

What is the focus of macroeconomics?

The study of the economy as a whole, including phenomena like growth rates, inflation, and unemployment.

What are the three key principles of economics?

1. Optimization, 2. Equilibrium, and 3. Empiricism.

What is optimization?

Trying to choose the best feasible option, given the available information.

What is equilibrium?

A situation in which every agent is simultaneously optimizing, so that nobody would benefit personally by changing his or her own behavior.

What is empiricism?

Analysis that is evidence-based and uses data to test theories and determine what is causing things to happen.

What is a trade-off?

A situation that arises when some benefits must be given up in order to gain others.

What is a budget constraint?

The set of all things that a person can choose to do or buy without breaking her budget, often expressed as an equation like $\text{Budget} = \text{Activity A} + \text{Activity B}$.

What is the definition of opportunity cost?

The best alternative use of a resource.

What is cost-benefit analysis?

A calculation that adds up costs and benefits using a common unit of measurement, like dollars, to identify the alternative with the greatest net benefit.

What was the estimated total annualized opportunity cost of time spent on Facebook in 2013?

Over \text{$450 billion}, based on an average opportunity cost of \text{$5/hour} for approximately $250 \text{ million}$ hours used daily.

How is net benefit calculated in cost-benefit analysis?

$\text{Net Benefit} = \text{Total Benefit} - \text{Total Cost}$.

What is the free-rider problem?

A situation where people pursue their own private interests and benefit from the investments or contributions of others without contributing themselves.

What distinguishes optimization in levels from optimization in differences?

Optimization in levels calculates the total net benefit of different alternatives, whereas optimization in differences calculates the change in net benefits when moving from one alternative to another.

What is marginal analysis?

A cost-benefit calculation that focuses on the difference between a feasible alternative and the next feasible alternative.

What is marginal cost?

The extra cost generated by moving from one feasible alternative to the next feasible alternative.

What does the Principle of Optimization at the Margin state?

An optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off.

What is comparative statics?

The comparison of economic outcomes before and after some economic variable is changed.

In the apartment commuting example, if the opportunity cost of time is \text{$10/hour} and a commute takes $20 \text{ hours/month}$, what is the monthly dollar cost of the commute?

20 \text{ hours/month} \times \text{$10/hour} = \text{$200/month}.

How do economists define rationality?

A decision maker is rational if he or she chooses the best feasible option given the information that is available.

What field of economics combines economic and psychological theories to identify why people sometimes fail to optimize?

Behavioral economics.

What are two common reasons people may fail to optimize?

Self-control problems (like procrastination or addiction) and being new to a task (making rookie mistakes).

What is the unifying feature of all the things that economists study?

Choice, rather than money.

What is the name of the newsmagazine mentioned as required reading for many world leaders?

The Economist.

Based on the study by Wilson and Frew, what is the relationship between distance from a city center and apartment rent in Portland, Oregon?

There is a strong negative relationship: rents fall as distance from the city center increases.