Introduction to Economic Thinking and Practice

Flashcards covering the introductory concepts of economic thinking, unintended consequences, and the principles of rational choice.

Abraham Wald

An economist and mathematician who advised placing aircraft armor on the areas where bullet holes were missing (engines and cockpits), identifying that planes hit in those areas did not survive to return.

Economics

The study of choices, specifically how economic agents make choices under the condition of scarcity.

Scarcity

A condition that exists whenever human wants exceed the resources available to satisfy them.

Unintended Consequences

Outcomes of a policy or action that were not anticipated; an advantage of the economic way of thinking is helping to understand and foresee these results.

Cobra Effect

A phrase capturing the idea of plans backfiring in bad ways; named after a British bounty program in India that led people to breed cobras for money, ultimately worsening the infestation.

Friedrich Bastiat

One of the smartest economist/philosophers who stated that a good economist takes into account both the visible effects of an action and those effects that must be foreseen.

Economic Way of Thinking

A perspective summarized by the central message that people respond to incentives.

Economizing / Optimizing Behavior

The process of individuals trying to do the best they can to achieve their objectives given the information they have available.

Rationality

The underlying principle that individuals act intentionally to not harm themselves and attempt to make decisions that provide the best possible outcome.

Exchange

Interactions between individuals driven by specialization and self-interest, resulting in both parties being better off.

Specialization

Focusing on a specific area of knowledge or task and offering that expertise to others in exchange for what they specialize in.

Self-interest

The pursuit of one's own clear objectives, which can include the well-being of others; it is distinct from being selfish.

Expected Additional Benefit ($EAB$)

Also known as marginal benefit ($MB$), this refers to the perceived gain or improvement an individual anticipates from choosing a specific action.

Expected Additional Cost ($EAC$)

Also known as marginal cost ($MC$), this refers to the perceived loss, sacrifice, or opportunity given up when choosing a specific action.

Decision Rule

The economic principle that individuals optimize by choosing actions where the expected additional benefit is at least as high as the expected additional cost, expressed as $EAB \ge EAC$.