Chapter 1: The Nature of Economics

A collection of vocabulary terms based on the lecture notes for Chapter 1: The Nature of Economics, covering basic definitions, economic systems, scientific methodology, and graphical analysis.

Economics

The study of how people allocate their limited resources to satisfy their unlimited wants; the study of how people make choices.

Incentives

Rewards for engaging in a particular activity that influence self-interested responses.

Resources

Things that have value and are used to produce goods and services that satisfy people’s wants.

Wants

What people would buy if they had unlimited income.

Microeconomics

The study of decision making undertaken by individuals (or households) and by firms.

Macroeconomics

The study of the behaviour of the economy as a whole, dealing with aggregates or economy-wide phenomena such as changes in unemployment or national income.

Artificial intelligence (AI) technologies

The development and implementation of methods utilizing automated data-analytics, machine learning, or virtual- or augmented-reality techniques to help consumers, businesses, and governments make decisions.

Economic system

The institutional mechanism that determines the way scarce resources are utilized to satisfy human wants.

The Three Basic Economic Questions

1. What and how much will be produced? 2. How will items be produced? 3. For whom will items be produced?

Centralized command and control (central planning)

An economic system where an authority makes all economic decisions.

Price system (market system)

A decentralized decision-making process in which prices are terms (signals) under which people agree to make exchanges.

Mixed systems

Economic systems, such as Canada’s, that incorporate aspects of both centralized command and control and a decentralized price system.

Rationality assumption

The assumption that people do not intentionally make decisions that would leave them worse off.

Models or theories

Simplified representations of the real world used as the basis for predictions or explanations.

Assumptions

The set of circumstances in which a model is applicable; simplified reality focusing only on relevant details.

Ceteris paribus

A Latin phrase meaning "other things constant" or "other things equal," assuming nothing changes except the factor or factors being studied.

Empirical science

A field that uses real-world data and evidence to evaluate the usefulness and accuracy of physical or social models.

Behavioural economics

An approach to the study of consumer behaviour emphasizing psychological limitations and complications that interfere with rational decision making.

Bounded rationality

The hypothesis that people are nearly, not fully, rational, often using rules of thumb because they cannot examine every possible choice.

Rules of Thumb

Simplified methods of making decisions that individuals fall back on because every possible choice cannot be considered.

Positive economics

Purely descriptive statements or scientific predictions of "what is," often in the form of "If A, then B."

Normative economics

Analysis involving value judgments or opinions about whether things are good or bad, focusing on "what ought to be."

Independent variable

A variable whose value is determined independently of, or outside, the equation under study.

Dependent variable

A variable whose value changes according to changes in the value of one or more independent variables.

Direct relationship

A positive relationship between two variables where an increase in one is associated with an increase in the other.

Inverse relationship

A negative relationship between two variables where an increase in one is associated with a decrease in the other.

Slope

The "incline" of a curve, defined as "rise over run" or the change in the $y$ value divided by the corresponding change in the $x$ value.