Learn: Economics and Decision-Making: Key Concepts and Models

Economics

The study of how humans make decisions in the face of scarcity

Counterfactual

A hypothetical scenario that shows what would have happened, if the policy had NOT occurred

Positive economics

"What is" through objective, testable data

Normative economics

"What should be?" Uses ethical judgements

Income

The flow of money received over a period; example: salary

Wealth

Total stock of assets; example: houses, land, savings

Lorenz Curve

Visual indicator

Gini CE

Mathematical indicator

Production Possibility Set and Frontier

A graph that shows the maximum possible combinations of two goods an economy can produce

Absolute Advantage

Being the most efficient overall in the production of a single good

Comparative advantage

Producing a good at a lower opportunity cost

Opportunity cost

The value of the next best alternative that you give up when you're making a choice

Economic growth

The increase in the production of products in a country over a period of time

Allocative efficiency

producing the goods that society wants

Productive efficiency

producing goods at the lowest possible cost

Preferences

the way an individual ranks different options, based on the satisfaction they receive

Normal good

demand increases when a person's income increases. Examples: organic food, new cars, nice restaurants

Inferior good

demand decreases when a person's income increases. Example: instant noodles, used cars

Ordinary goods

: as the price increases, demand will decrease

Giffen goods

RARE goods where, as the price increases, demand increases. Examples: Staple foods during poverty, like bread or rice during famine

Substitutes

products that serve the same purpose and can replace one another. If the price of one goes up, demand will increase for the other. Example: Coca Cola vs Pepsi

Complementary

products that go together. If the price of peanut butter goes up, then the demand for jelly will decrease

Game

the study of how people, companies, and governments make decisions when their success depends on the choice of others

Nash equilibrium

each player is doing the best they can, given what everyone else is doing. "Given what everyone else is doing, do I want to switch?"

Dominant strategy

the best move you can make regardless of your opponent's decision