CH 1 Q and A: Economic Concepts

Key economic concepts from the lecture notes covering incentives, trade, scarcity, opportunity cost, and unintended consequences.

Unintended Consequence

An unforeseen and often undesirable result that occurs in addition to the predictable and desired result of a policy or action, such as people finding creative ways to carry dogs in bags on the New York City Subway to avoid fines.

Incentives

Economic factors that motivate individuals or firms to act in certain ways.

Trade (Economic Concept)

An economic exchange that economists generally view as a 'win-win proposition' for all parties involved.

Money (in Circular Flow Model)

A common medium of exchange that enhances the efficiency of the circular flow model by eliminating the need for barter systems.

Direct Negative Incentive

A disincentive that involves a direct threat of punishment or loss for undesirable behavior, such as threatening to fire employees who do not perform well.

Positive Incentive

A reward or benefit offered to encourage a desired behavior, such as a car insurance company offering discounts for accident-free drivers.

Unintended Consequence (Infant Safety Policy)

The unforeseen effect of a policy, such as legislation requiring infant seats on airplanes leading to more families with infants choosing to drive instead of fly.

Scarcity

The fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources, meaning items like drinking water or autographed t-shirts are scarce, while gravity is not.

Trade-offs

The concept that choosing one thing means giving up something else; exemplified by Dwight D. Eisenhower's quote on military spending versus investments in schools, power plants, and hospitals.

Unintended Consequences of Binding Minimum Wage

Negative effects that can result from a binding minimum wage, including unemployment, firms replacing low-skilled jobs with technology, and firms relocating to areas with lower wages.

Scarcity of Money

The economic principle that money is a limited resource and must be consciously managed and allocated.

Economic Decision-Making

The process by which economists evaluate an action by considering both its marginal benefits and marginal costs.

Trade Creating Value

The process where goods and services are exchanged across different locations, such as the global production and sale of an iPhone, resulting in increased value for all participants.

Value Created in an Exchange

The total benefit realized by both the buyer and the seller in a transaction, calculated as the sum of the buyer's net gain and the seller's net gain (e.g., Deltra + Deirdre = $28 for cookies).

Opportunity Cost

The value of the next best alternative that must be sacrificed when making a choice, including both direct costs (like tuition and books) and indirect costs (like forgone income).

Marginal Analysis (Business Operations)

The economic reasoning used by businesses to decide whether to continue an operation (e.g., staying open in the afternoon) by comparing the marginal benefit to the marginal cost; if marginal cost exceeds marginal benefit, it's logical to close.