Principles of Economics: Chapter 1

Chapter 1 quiz

economics

the study of how people use their scarce resouces to satisfy their unlimited wants.

resources

the inputs, or factors of production, used to produce the goods and services that provide people want; this consists of labor, capital, natural resources, and entrepreneurial ability.

labor

the physical and mental effort used to produce goods and services.

capital

the buildings, equipment, and human skills used to produce goods and services.

marginal

Incremental, additional, or extra; used to decribe a change in a economic variable. (it refers to a change in an economic variable)

microeconomics

the study of economic behavior in particular markets, such as that for computers or unskilled labor. IN OTHER WORDS: study of your economic behavior and the economic behavior of others.

macroeconomics

The study of the economic behavior of entire economies. IN OTHER WORDS: studies the performance of the economy as a whole.

economic theory or economic model

A simplification of reality used to make predictions about cause and effect in the real world.

variable

a measure that can take on different values at different times.

other-things constant assumption

The assumption, when focusing on the relation among key economic variables remain unchanged.

behavioral assumption

An assumption that describes the expected behavior of economic decision makers, what motivates them.

hypothesis

A theory about relationships among key variables.

positive economic statement

A statement that can be proved or disproved by reference to facts.

normative economic statement

A statement that represents an opinion, which cannot be proved or disproved.

scientific method

What economists employ to study economic problems.

1. Idenitfy the question

2. Specify assumptions

3. formulate a hypothesis

4. test the hypothesis, reject the hypothesis (modify approach), and use the hypothesis until a better one shows up.

market

a set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms.

product market

A market in which a good or service is bought and sold.

resource market

A market in which a resource is bought and sold.

circular flow model

A diagram that outlines the flow of resources, products, income, and revenue amond economic decision makers.

fallacy of composition

The incorrect belief that what is true for the individual, or part, must necesarily be true for the group or whole. (Example: arriving early to buy tickets for a frank ocean concert but everyone else had the same idea)

secondary effects

Unintended consequences of economic actions that may develop slowly overtime as people react to events. (Example: rent control, over time less apartments get build due to rent control. Why? Rent control caused renting to be less profitable.)

rational self interest

each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit.

natural resources

So-called gifts of nature used to produce goods and services; includes renweable and exaustible resources. Examples: land, water, oil, trees, and animals.

scarcity

occurs when the amount of people desire exceeds the amount available at a zero price.

human capital

stock knowledge, skills, abilities attributes, contribute to their productivity and economic growth.

entrepreneurial ability

Managerial and organizational skilled needs to start a firm, combined with the willingness to take risks. IN OTHER WORDS: The ability to combine land, labor, and capital to create new goods and services, taking risks to innovate and drive economic growth.

good

A tangible item use to satisy human wants.

service

an activiy used to satisy human wants.

wages

Payment to resource owners for their labor.

interest

Payment to resource owners for the use of their capital.

rent

payment to resource owners for the use of their natural resources.

profit

the reward for entrpreneurial ability; the revenue from sales minus the cost of resources used by the entrepreneur.

four decison makers

Their interaction determines how an economy’s resources are allocated:

1. Household

2. Firms

3. Government

4. Rest of the World (foreign households, foreign firms, etc.)

Association is causation fallacy

The incorrect idea that if two variables are associated in time, one must necessarily cause the other. (Example: Students who bring expensive water bottles to school get higher grades. This is false, to assume that event A caused event B because two are associated in time is commiting____)