Chapter 1: Economics and Economic Reasoning (Vocabulary Flashcards)

A set of vocabulary flashcards covering key concepts from the chapter on economics and economic reasoning.

Economics

The study of how human beings coordinate their wants and desires given a society’s decision-making mechanisms, social customs, and political realities.

Scarcity

A condition where wants exceed the available resources; the degree of scarcity changes and depends on technology and human action.

Microeconomics

The study of individual choice and how economic forces influence it (e.g., pricing of firms, household decisions, resource allocation).

Macroeconomics

The study of the economy as a whole (e.g., inflation, unemployment, economic growth).

Marginal Cost

The additional cost incurred by producing one more unit.

Marginal Benefit

The additional benefit gained from producing or consuming one more unit.

Economic Reasoning

Thinking like an economist: analyzing issues and comparing costs and benefits while abstracting from unimportant elements.

Economic Decision Rule

If MB > MC, do it; if MC > MB, don’t do it.

Opportunity Cost

The benefit foregone from choosing the next-best alternative; a key basis of cost/benefit reasoning.

Implicit Costs

Costs associated with a decision that are not included in normal accounting costs.

Illusionary Sunk Costs

Costs that appear in financial accounts but have already been spent; not relevant for future decisions.

TANSTAAFL

There ain’t no such thing as a free lunch.

Price Mechanism

The process by which prices guide decisions and allocate resources in a market.

Invisible Hand

The price mechanism that guides market actions, leading to resource allocation.

Shortage

A situation where quantity demanded exceeds quantity supplied, causing prices to rise.

Surplus

A situation where quantity supplied exceeds quantity demanded, causing prices to fall.

Coordinate Problems in an Economy

The three fundamental decisions: what to produce, how to produce, and for whom to produce.

Inflation

A general increase in prices across the economy.

Unemployment

The share of the labor force that is without work but seeking employment.

Economic Growth

An increase in a country’s production of goods and services over time.

Economic Model

A framework that places the generalized insights of a theory into a specific context.

Economic Principle

A commonly held insight stated as a law or general assumption.

Theorem

A proposition that is logically true based on the model’s assumptions.

Positive Economics

The study of what is and how the economy works, without value judgments.

Normative Economics

The study of what the goals of the economy should be; value-laden judgments about policy.

Art of Economics

Using knowledge of positive economics to achieve the goals determined in normative economics.

Economic Institutions

Laws, practices, and organizations that affect the economy and can vary across nations.

Objective Policy Analysis

Policy analysis that keeps value judgments separate from the economic analysis.

Subjective Policy Analysis

Policy analysis that reflects the analyst’s views on how things should be.