Econ Exam I- Chapter 1

  1. scarcity:
    situation in which unlimited wants exceed the limited resources available to fulfill those wants
  2. economics:
    the study of the choices people make to attain their goals given their scarce resources
  3. economic model:
    simplified version of reality used to analyze real world economic situations
  4. three economic ideas:
    • 1.) people are rational
    • 2.) people respond to economic incentives
    • 3.) optimal decisions are made at the margin
  5. market:
    a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
  6. marginal:
    extra, or additional
  7. economists reason that the optimal decision is to continue any activity up to the point where
  8. marginal analysis:
    where you compare MB & MC
  9. trade-off:
    b/c of scarcity producing more of one good or service means producing less of another good or service
  10. opportunity cost:
    highest valued alternative that must be given up to engage in an activity
  11. societies organize their economies in two main ways (1):
    centrally planned economy: where the government decides how economic resources will be allocated
  12. societies organize their economies in two main ways (2):
    market economy: where the decisions of households and firms interacting in markets allocate economic resources
  13. 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
  14. product efficiency:
    where a good or service is produced at the lowest possible cost
  15. allocative efficiency:
    state of the economy in which production is in accordance with consumer preferences where MB=MC of producing it
  16. voluntary exchange:
    occurs when both buyer and seller of a product are made better off by the transaction
  17. equity:
    fair distribution of economic benefits
  18. there is often a trade-off between
    efficiency and equity
  19. economic variable:
    something measurable that can have different values
  20. positive analysis:
    concerned with what is
  21. normative analysis:
    concerned with what ought to be
  22. economics is a
    social science, studies the actions of individuals
  23. microecon:
    study of how households ad firms make choices how they interact in markets, and how the government attempts to influence their choice
  24. macroecon:
    study of the economy as a whole (inflation, unemployment, economic growth)
  25. the definition of econ given ignores how
    the choices interact and lead to aggregate outcomes
  26. apart from scarcity and individually rational decision a third leg of economic science is
    the study of forms of interaction among individuals
  27. 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
Card Set
Econ Exam I- Chapter 1