ECON Chapter 1

Consumers

Those making decisons

Firms

The institutions that organize the production of goods and services

Scarce Resources

Resources that are limited in supply so that choices have to be made about their use

Economic Agents

Decision makers e.g. consumers and producers

Positive Economics

The branch of economic analysis that describes the way the economy actually works

Normative Economics

Makes prescriptions about the way the economy should work

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Optimization

Making the best or most efficient use of a situation, product, or resource

Equilibrium

When everyone is optimizing; no one would be better off with a different choice; Balance

Empiricism

The belief that accurate knowledge can be acquired through observation and data to answer interesting questions

The Scientific Method

1. Developing models that explain some part of the world
2. Testing those models using data to see how closely the model matches what we actually observe.

Model

A simplified description or structure representing that of reality

Median

The middle score in a distribution; half the scores are above it and half are below it

Mean

The arithmetic average of a distribution, obtained by adding the scores and then dividing by the number of scores

Causation

A cause and effect relationship in which one variable controls the changes in another variable.

Correlation

A measure of the relationship between two variables

Causation vs. Correlation

Causation is a direct relationship with an understood mechanism linking elements. Correlation has a mutual relation, but lacks a mecanism.

Omitted Variables

If we ignore something that contributes to cause and effect, then that something is an omitted variable. A correlation might not make sense until the omitted variable is added

Reverse Causality

The situation in which the apparent "cause" is actually the "effect"

Controlled Experiments

One variable is manipulated while others are held constant

Natural Experiments

Naturally occurring events that approximate a controlled experiment where something has changed in one place but has not changed somewhere else

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs