Microeconomics, CHAPTER 1

Markets

Bring buyers and sellers together to exchange goods and services

Trade-off

Giving up one thing for another

circular flow diagram

Shows how goods, services, and resources flow through the economy

Economics

The study of how individuals and societies allocate their limited resources to satisfy their practically unlimited wants

negative incentive

discourage action by providing undesirable consequences or punishments

Direct Incentives

easy to recognize

positive incentive

encourage action by offering rewards or payments

Incentives

factors that motivate a person to act or exert effort

Indirect Incentives

incentives that indirectly cause an action

Five Foundations of Economics

incentives, trade-offs, opportunity cost, marginal thinking, trade creates value

Scarcity

refers to the limited nature of society's resources, given society's unlimited wants and needs

comparative advantage

refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can

economic thinking

requires a purposeful evaluation of the available opportunities to make the best decision possible

marginal thinking

requires decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost

marginal cost

the cost of producing one more unit of a good

marginal benefit

the extra benefit of adding one unit

opportunity cost

the highest-valued alternative that must be sacrificed to get something else

Microeconomics

the study of the individual units that make up the economy

Macroeconomics

the study of the overall aspects and workings of an economy

Trade

the voluntary exchange of goods and services between two or more parties

indirect incentives create

unintended consequences