Untitled Flashcards Set

Economics Basics (Chapter #1)

Scarcity: refers to the limited resources available to satisfy the unlimited wants and needs of people

Economics: the study of how people choose to use limited resources to satisfy the unlimited wants and needs of people

Microeconomics: the branch of economics that studies the behavior of individuals and smaller firms in the economy

Macroeconomics: the branch of economics that studies the economy as a whole

Economize: to maximize the benefits and reduce costs

Effective: A particular use of resources that achieves a desired end, doing the right things

Efficient: The use of minimum resources to achieve a desired end, doing things right

Equitable: the fair and just distribution of economic resources

Economic Scientific Method: 

Economy: a self-sustaining system in which many independent transactions by individuals, households, businesses and institutions create distinct flows of money and products.

Positive/Analytical Economics: Branch of economics that deals with facts and direct observation of the world. There are two types: Descriptive statements, which describe the past, and Conditional statements, which are forecasts of future events

Normative/Policy Economics: branch of economics that deals with value judgements about economic subjects. They are statements that express what economists think should be the case based on their value judgements, cannot be confirmed or refuted based only using facts

Economic Decision Making Model: 

1. Define the problem

2. Clarify goals and priorities

3. List the possible alternatives

4. Establish the criteria used to judge the alternatives

5. Weight each criterion based on goals and priorities

6. Evaluate each alternative

7. Make a decision

8. Act on the decision

9. Assess effectiveness

Utility: the usefulness, satisfaction, or benefit derived from each available option

Util: a theoretical unit of satisfaction that a person gains from consuming an item

Economic Fallacies, Theories, and Laws (Chapter #2)

Logical Fallacy: a hypothesis that has been proven to be false but is still accepted by many people because it appears to be true (a mistaken belief, especially based on unsound argument). These can be proven wrong with reasoning. It helps with identifying reasoning errors

Fallacy of Composition: A mistaken belief that what is good for an individual is automatically good for everyone or what is good for everyone is good for the individual

Post Hoc Fallacy: A mistaken belief that what occurs before some event is the cause of the event

Fallacy of Single Causation: A mistaken belief based on oversimplification that a particular event has one cause rather than several causes

Opportunity Cost: the value or benefit that must be given up to achieve something else (“What you give up to get something else”). Note that the thing that is given up is the next best thing on the decision making process. These measure both the explicit and implicit costs - the cost of resources already owned by the firm that could have been put to some other use

Accounting Cost: the explicit monetary value of taking action. They are the explicit costs - payments made to others in the course of running a business (such as rent, salaries, taxes)

Here’s a chart comparing the accounting costs and opportunity costs

Factors of production/productive resources: resources (inputs) that are used to produce goods and services (outputs). The four factors of production are:

• Land: all natural resources used to produce goods  

• Labour: the physical and mental effort by people to produce goods and services 

• Capital: refers to machinery, warehouses, equipment used to produce goods and services and the money used to acquire them.

• Entrepreneurship: The contribution made from a innovator who assumes risk and organizes the above three to produce goods and services

Production Possibilities Frontier: the curve representing the maximum amount of two items that can be produced with a given amount of resources. One of the assumptions here is that only two products are produced in the economy, the economy has fixed resources and technology, and the economy is at full employment. A point outside the curve is unattainable with the current factors of production. A point inside the curve is inefficient. The optimal point is somewhere on the curve.

Relative Cost: The cost of producing one item in terms of numbers of another 

Law of Increasing Relative Cost: the increase in relative cost of producing one item in the cost of another that could be produced with the same resources. The Law of Decreasing and Constant Relative Costs follow this same idea

Law of Diminishing Returns: the eventual decline in the rate of extra output produced that occurs when one input used in the production process is held constant and the other inputs increase.

Causes of Diminishing Returns:

1. Fixed Factors of Production: 

2. Scarce Factors:

3. Lack of Perfect Substitutes:

4. Optimum Production:

5. Natural Factors:

Law of Increasing Returns to Scale: As production increases the percentage change in output is greater than the percentage change in inputs. The Law of Decreasing and Constant Returns to Scale follow this same idea