situation in which unlimited wants exceed the limited resources available to fulfill those wants
economics:
the study of the choices people make to attain their goals given their scarce resources
economic model:
simplified version of reality used to analyze real world economic situations
three economic ideas:
1.) people are rational
2.) people respond to economic incentives
3.) optimal decisions are made at the margin
market:
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
marginal:
extra, or additional
economists reason that the optimal decision is to continue any activity up to the point where
MB=MC
marginal analysis:
where you compare MB & MC
trade-off:
b/c of scarcity producing more of one good or service means producing less of another good or service
opportunity cost:
highest valued alternative that must be given up to engage in an activity
societies organize their economies in two main ways (1):
centrally planned economy: where the government decides how economic resources will be allocated
societies organize their economies in two main ways (2):
market economy: where the decisions of households and firms interacting in markets allocate economic resources
mixed economy:
where most decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
product efficiency:
where a good or service is produced at the lowest possible cost
allocative efficiency:
state of the economy in which production is in accordance with consumer preferences where MB=MC of producing it
voluntary exchange:
occurs when both buyer and seller of a product are made better off by the transaction
equity:
fair distribution of economic benefits
there is often a trade-off between
efficiency and equity
economic variable:
something measurable that can have different values
positive analysis:
concerned with what is
normative analysis:
concerned with what ought to be
economics is a
social science, studies the actions of individuals
microecon:
study of how households ad firms make choices how they interact in markets, and how the government attempts to influence their choice
macroecon:
study of the economy as a whole (inflation, unemployment, economic growth)
the definition of econ given ignores how
the choices interact and lead to aggregate outcomes
apart from scarcity and individually rational decision a third leg of economic science is
the study of forms of interaction among individuals
the argument for rationality is unnecessary and inadequate b/c
theories tend to be based on more primitive concepts and it fails to make clear that there is a large literature in econ questioning rationality