Unit 1 econ test

Economics

The study of how people choose to use their limited resources (time/money) to satisfy their unlimited wants

Scarcity

The condition in which our wants are greater than the resources available to satisfy them

What is the fundamental economic problem?

Scarcity

Positive economics

Describes how things are and why. Involves analyzing how economies work. "Theory"

Normative economics

Determines the "best choice" based on specific criteria. Involves making policy recommendations. "Action"

Who is considered the "father of economics"? What famous economics book did this person write in 1776?

Adam Smith. The Wealth of Nations

"Scarcity forces people to make choices" principle

Having enough money to buy one thing or another, but not both.

No-free-lunch principle

The lunch was free to you, but someone had to pay in some way

"Choices have costs and benefits" principle

Involves "cost benefit analysis". You have to lose something to gain something.

Costs

Negatives/what you lose (money, time, energy)

Benefits

Positives/what you gain

Thinking-at-the-margin principle

The idea that most choices involve thinking in terms of a "little more" or a "little less" of something

Marginal cost

What you give up to add one more unit of something

Marginal benefit

What you gain by adding one more unit of something

"Incentives Matter" principle

The idea that people respond to incentives in generally predictable ways

Incentive

Something that motivates a person to take a particular course of action

Positive incentives

Encourage action by offering rewards or payments (Farbucks, money for work, awards for good grades)

Negative incentives

Discourage action by providing undesirable consequences or punishments (loss of privileges for bad behavior, jail/fines for law-breaking)

Law of Unintended Consequences

The actions of people and governments often have effects that are unexpected (a reasonable person would not have anticipated them) (Farbucks loophole of 2024, taking advantage of the system to gain rewards)

"Future consequences count" principle

Decisions made today have consequences not only for today but also in the future

"Trade makes people better off" principle

By focusing on what we do well and then trading with others for what they do well, we will end up with more and better choices than trying to do everything ourselves

Trade

The voluntary exchange of goods and services

Specialization

Doing one task/job very well

Division of labor

Breaking up production into specialized tasks for increased productivity. Increases how fast things are created and the quality of things created

Wealth

The total value of all things a person owns

3 ways trade promotes wealth:

1. Gets goods to those who value them

2. Increases the quantity and variety of goods

3. Lowers the cost of goods

Standard of living

The degree of wealth and material comfort available to a person or community

What is the relationship between specialization and standard of living?

Societies that rely on specialization have a higher standard of living than those who don't

"Markets coordinate trade" principle

The idea that markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers

Market

Any arrangement that brings buyers and sellers together to do business with each other

Free market

A market with little or no government interference. Buyers and sellers trade until satisfied. Most efficient type of market

Who came up with the "invisible hand" and what is it?

Adam Smith. An individual's pursuit of economic self-interest can promote the well-being of society as a whole.

Rational-behavior-model

People behave rationally by making self-interested decisions that they think will fulfill their wants and needs to the greatest extent possible. Assumes people do not take into account the well-being of others when they act.