Microeconomics: Unit 1

Economics

How people manage resources and make choices

Microeconomics

The study of how individuals and firms manage resources

Macroeconomics

The study of the economy as a whole, and how policy makers manage the growth and behavior of the overall economy

Rational behavior

When people make choices to achieve their goals in the most effective way possible, given teh resources they have

Scarcity

The condition of wanting more than we can get with the available resources

Trade-off

When the decision means gaining something at the cost of losing another

Opportunity cost

The cost of the next-best alternative that you gave up

Marginal decision making

The idea that rational people compare the additional benefits of a choice against the additional costs

Sunk cost

• A cost that has already been incurred and cannot be recovered

• Doesn’t affect marginal decision

Incentive

Something that causes people to believe in a certain way by changing the trade-offs they face

Positive incentive

Makes people more likely to do something

Negative incentive

Makes people less likely to do something

Efficiency

Ensures people get what they want and need, given the available resources

• Not just maximizing productivity

Resource

Anything that can be used to make something of value

Normal circumstances

The assumption that the economy is operating efficiently and individuals/firms provide the things people want

Positive analysis/statement

States how things actually are

Normative analysis/statement

States how things SHOULD be

Correlation

A consistently observed relationship between two events

Causation

A relationship where one thing brings about the other

Economic model

A simplified version of a complex situation, predicts cause and effect

Economic analysis

Requires us to combine theory with data/observations and subject both to tough scrutiny before drawing conclusions