chapter 1: economic foundations and models
percentage change formula
% change = (value in 2nd period - value in 1st period) x 100 value in the 1st period
markets
a group of buyers and sellers of a good/service and the institution/arrangement by which they come together to trade
services
activities performed for others ex: providing haircuts, investment advice
firm, company, business
an organization that produces a good or service
normative analysis
concerned with WHAT OUGHT TO BE
market economy
decisions of households and firms interacting in markets allocate economic resources
demand curve
graph showing the relationship between the PRICE of a good and the QUANTITY demanded at each price
capital
manufactured goods that are used to produce other goods and services
efficient markets
promote competition and facilitate voluntary exchange
equity
revolves around the idea of fairness. involves equal distribution of economic benefits.
time series graph
shows information on economic variables
economic models
simplified versions of reality used to analyze real-world economic situations
scarcity
situation where wants exceed unlimited resources
opportunity cost
the highest valued alternative given up in order to engage in an activity
Trade-off
the idea that, because of scarcity, producing more of one good or service means producing less of another good or service
optimization
using limited resources in the most efficient and consumerist way
reverse causality
when we conclude the changes in variable X can cause changes in variable Y, when in reality it is the other way around.
positive analysis
- concerned with WHAT IS - measures the costs and benefits of courses of action
household
- people who occupy the same housing unit - suppliers of factors of production used by firms for production - demand goods and services produced by firms and government
3 key economic ideas
1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin
economic graphs serve 2 key purposes:
1. simplify economic ideas 2. make ideas more concrete so they can be applied to real world problems
total revenue
= price x quantity
allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing items
people respond to economic incentives
As incentives change, so do the actions that people will take
optimal decisions are made at the margin
Most decisions in life involve doing a little more or a little less. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost—in symbols, where MB = MC.
productive efficiency
a situation in which a good or service is produced at the lowest possible cost, due to competition
voluntary exchange
a situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction
ommited variable
a variable that affects the other variable and its omission can lead to false conclusions about cause and effect
centrally planned economy
an economy in which the government decides how economic resources will be allocated. normally result in a low standard of living of an average person.
marginal
anything extra or additional that we do in order to benefit from
People are rational
assume that people use all their available info to achieve their goals and make the best decisions(benefits outweigh the costs)
marginal analysis
comparing marginal cost and marginal benefit
economists
describe how individuals/businesses/government make choices and their consequences advise on how many to make better decisions
in markets economies...
firms decide how to produce a good markets determine who receives the good consumers decide what to produce
mixed economy
most economic decisions result from the interactions between buyers and sellers in markets, but the government plays a significant role in the allocation of resources
when analyzing human behavior, economists perform:
positive and normative analysis
Entrepreneur
someone who operated a business, decides what goods and services to produce and how
economic variables
something measurable that can have different values, such as the incomes of doctors
economic hypothesis
statement about economic variable that can either be correct or incorrect. used ro determine the usefulness of assumptions.
Microeconomics
study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
economics
study of the choices people make to attain their goals, given their resource scarcity
goods
tangible merchandise ex: books, computers,
percentage change
the change in some specific economic variable, usually from one period to another
profit
the difference between its revenue and its costs (including the opportunity costs of all resources used)
innovation
the practical application of making improvements to a good or to the production of a good
technology
the processes a firm uses to produce goods and services
Macroeconomics
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
revenue
the total amount received from selling a good or service
