Microeconomics- Chapter 1 (Exam 1)

economics

the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities

coordination

how the 3 central problems facing any economy are solved

1. how much and what to produce

2. how to produce it

3. for whom to produce it

scarcity

the amount of goods available is less than needed to satisfy individuals desires

coercion

limiting peoples wants and increasing the amount of work individuals are willing to do to fulfill those wants

microeconomics

the study of individual choice, and how that choice is influenced by economic forces

macroeconomics

the study of the economy as a whole

marginal cost

additional cost to you over and above the costs you have already incurred

sunk cost

costs that have already been incurred and cannot be recovered (shouldn’t influence decisions)

marginal benefit

additional benefit above what you’ve already derived

opportunity cost

the benefit that you might have gained from choosing the next-best alternative

implicit costs

costs associated with a decision that often aren’t included in normal accounting costs

economic forces

rationing mechanisms/necessary reactions to scarcity

market force

economic force that is given relatively free rein by society to work through the market

invisible hand

the price mechanism that guides our actions in a market

social forces

forces that guide individual actions even though those actions may not be in an individual’s selfish interest

political forces

legal directives that direct individuals actions

economic model

a framework that places the generalized insights of the theory in a more specific contextual setting

economic principle

a commonly held economic insight stated as a law

experimental economics

a branch of economics that studies the economy through controlled experiments

natural experiments

one event is changed in one place but not in the other

theorem

propositions that are logically true based on assumptions in a model

precepts

policy rules that conclude that a particular course of action is preferable

market efficiency

the market will coordinate individual’s decisions, allocating scarce resources as cheaply as possible

invisible hand theorem

a market economy, through the price mechanism, will tend to allocate resources efficiently

economic policies

actions (or inaction) taken by the government to influence economic actions

economic institutions

portion of the economy that is influenced by economic policies

positive economics

study of what is, and how the economy works (looks for empirical facts and develops theorems)

normative economics

the study of what the goals of the economy should be (treated # of ppl benefitted, not inherit morality of each choice)

impartial spectator tool

each person places himself in the position of a third-person and judges the situation from everyone’s perspective

art economics

the application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics

scarcity and choice

central economic problem

assumption

something held to be a fact whether or not it is

free goods

goods that are not scarce therefore they are not priced (ex. salt water, air, sunlight)

methods of allocation

• posted price

• first-come, first-serve

• physical force

• auction price

• chance

• merit

• favoritism

• demographics

• charity

• equal divide

cost-benefit analysis

economic reasoning

marginal pricing

pricing differently for each additional unit (ex. only charging for the cost of production and not the overhead costs to make some profit)

equity

the concern with goods and services

four factors of production

1. Land

2. Labor

3. Capital

4. Entrepreneurship

Land

includes what is naturally occurring (ex. minerals, natural oils, native animals)

Labor

number of workers in the economy

capital

physical, human, and social

physical capital

plant equipment, technology, infrastructure (public and private)

human capital

the level of education/training/experience of labor

social capital

refers to trust of the society’s institution and of members of society; a willingness to live by the rules

public trust

trust the gov. and it’s officials

social trust

trust the community and the people around you

entrepreneurship

the ability to create goods and services from the other three factors

three central questions

1. What (and how much) to produce

2. How to produce

3. For whom to produce

The scientific method

a method of explanation that develops or tests theories about how observable facts that are related. The goal is explanation

hypothesis

a tentative statement (an educated guess) about a relationship between observable facts or events

theory

an explanation about the relationship of two or more variables

variables

any factor, trait, or condition that can exist in differing amounts or types

correlation

a significant statistical relationship but does not necessarily imply causation

causation

demonstration of how one variable affects another

direct relationship

variables move in the same direction

inverse relationship

variables move in the opposite directions

independent variable

factor that is allowed to change (on y-axis) the experimenter changes

dependent variable

independent variable causes the change

1. land availability

2. fertile soil availability

3. water availability

three main constraints to crop production

negative externalities

costs that effect societies but not the individual businesses themselves (ex. pollution from factory farms)