Chapter 1: Thinking Like an Economist Vocabulary

Vocabulary flashcards covering core principles, economic definitions, and mathematical appendix terms from Chapter 1.

Economics

The study of how people make choices under conditions of scarcity and of the results of those choices for society.

Scarcity Principle

The principle that although we have boundless needs and wants, the resources available to us are limited; having more of one good thing usually means having less of another (also called the No-Free-Lunch Principle).

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Rational Person

Someone with well-defined goals who tries to fulfill those goals as best he or she can.

Economic Surplus

The benefit of taking an action minus its cost.

Opportunity Cost

The value of what must be forgone to undertake an activity.

Sunk Cost

A cost that is beyond recovery at the moment a decision must be made.

Marginal Cost

The increase in total cost that results from carrying out one additional unit of an activity.

Marginal Benefit

The increase in total benefit that results from carrying out one additional unit of an activity.

Average Cost

The total cost of undertaking $n$ units of an activity divided by $n$.

Average Benefit

The total benefit of undertaking $n$ units of an activity divided by $n$.

Normative Economic Principle

An economic principle that provides guidance about how people should behave.

Positive Economic Principle

An economic principle that predicts or describes how people actually will behave.

Incentive Principle

A principle stating that a person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises.

Microeconomics

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.

Macroeconomics

The study of the performance of national economies and of the policies that governments use to try to improve that performance.

Economic Naturalist

Someone who uses insights from economics to help make sense of observations from everyday life.

Equation

A mathematical expression that describes the relationship between two or more variables.

Variable

A quantity that is free to take a range of different values.

Dependent Variable

A variable in an equation whose value is determined by the value taken by another variable in the equation.

Independent Variable

A variable in an equation whose value determines the value taken by another variable in the equation.

Constant (or Parameter)

A quantity in an equation that is fixed in value.

Vertical Intercept

In a straight line, the value taken by the dependent variable when the independent variable equals zero.

Slope

In a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run).