Chapter 1- Economic Thinking
Which assumptions reflect permanent universal conditions?
- the world has limited productive resources -more output satisfies more wants
order of operations
-Simplify inside parentheses and brackets. -Simplify the exponent. -Multiply and divide from left to right. -Add and subtract from left to right.
There are four productive resources
-land -economic capital -labor -entrepreneurship
division of labor
Division of work into a number of separate tasks to be performed by different workers
In order to calculate an economic equation to understand its economic implications, what must one remember to do?
Order of operations
Scarcity
The resources that we value—time, money, labor, tools, land, and raw materials—exist in limited supply. There are simply never enough resources to meet all our needs and desires. This condition is known as scarcity.
circular flow diagram
a diagram indicating that the economy consists of households and firms interacting in a goods-and-services market and a labor market
The circular flow diagram demonstrates
a direct relationship between groups in an economy
goods-and-services market
a market in which firms are sellers of what they produce, and households are buyers
independent relationship
a relationship between two independent variables such that when one changes, the other does not change, and vice versa; also called a "constant relationship"
function
a relationship or expression involving one or more variables
economic model
a simplified version of reality used to analyze real-world economic situations
Because of our limited money, time, and effort, we are best off when we allocate those things
by constantly assessing the opportunity costs of our choices
Functions are often described as cause and effect in economics. In an economics function, if the variable is on the right-hand side and is doing the explaining, it represents a(n)________?
cause
function
describes a relationship involving one or more variables
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
specialization
in a particular small job allows workers to focus on the parts of the production process in which they have an advantage
opportunity cost
indicate what must be given up to obtain something that's desired; the most desirable alternative given up as the result of a decision
slope of zero
indicates that there is a constant relationship between two variables: when one variable changes, the other does not change
negative slope
indicates that two variables are negatively related; when one variable increases, the other decreases, and when one variable decreases, the other increases
positive slope
indicates that two variables are positively related; when one variable increases, so does the other, and when one variable decreases, the other also decreases
If a data line on a graph has a slope of zero it means there
is a constant relationship between x and y
What is one way to express economic theory?
mathematical equations
If an economist is trying to predict the outcome from particular causes and effects, what is the best tool(s) for her to use in order to test out her economic model?
mathematical functions
slope of zero
means that there is a constant relationship between x and y. Graphically, the line is flat; the rise over run is zero.
negative slope
means that two variables are negatively related; that is, when x increases, y decreases, and when x decreases, y increases.
positive slope
means that two variables are positively related—that is, when x increases, so does y, and when x decreases, y decreases also
What will we never do in a world of scarcity?
meet all of society's wants
What is NOT included in economic capital?
money
monetary policy
policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
Once a model of reality is constructed around certain assumptions, it can be tested to determine its value in
predicting outcomes
The distinguishing feature of economic capital (as opposed to financial capital, like money) is that it is
productive
What can be assumed if a model can accurately predict outcomes?
the assumptions of the model are generally accurate
slope
the change in the vertical axis divided by the change in the horizontal axis
x-axis
the horizontal line on a graph
labor market
the market in which households sell their labor as workers to businesses or other employers
For an economist or mathematician, a variable is
the name given to a quantity that can assume a range of values
If a data line on a graph slopes upward as it goes to the right, it is depicting that
the relationship between the variable on the axes is direct
In the case of an negative relationship between two variables, all else remaining constant
the value of the two variables will move in opposite directions from each other
division of labor
the way in which the work required to produce a good or service is divided into tasks performed by different workers
What combination of model characteristics are frequently used in the most effective models?
useful and simple
economies of scale
when the average cost of producing each individual unit declines as total output increases
specialization
when workers or firms focus on particular tasks for which they are well suited within the overall production process
Given that spending for a certain household will always include a base amount of $1000/month, and that additional spending is equal to half of any income earned, we can predict household spending with a model y=b+mx, where
y represents spending
Economics
The study of how people seek to satisfy their needs and wants by making choices
In the case of a positive relationship between two variables, all else remaining constant:
the value of the two variables will move in the same direction
y-axis
the vertical line on a graph
Land, or natural resources, include(s) the fertility of the land, minerals below it, and________?
wind and sun
direct relationship
a relationship between two variables such that both either increase or decrease together; also called a "positive relationship"
inverse relationship
a relationship between two variables such that when one increases, the other decreases, or vice versa; also called "negative relationship"
economic model
is a simplified version of reality that allows us to observe, understand, and make predictions about economic behavior
economics
is the study of how humans make choices under conditions of scarcity in an attempt to satisfy their unlimited wants
opportunity cost
is the value of the next best alternative
microeconomics
the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and businesses
macroeconomics
the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
productive resource
the inputs used in the production of goods and services to make a profit: land, economic capital, labor, and entrepreneurship; also called "factors of production"
variable
the name given to a quantity that can assume a range of values
intercept
the point on a graph where a line crosses the vertical axis or horizontal axis
interception point
the point on a graph where two lines cross
Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
Microeconomics
the study of how households and firms make decisions and how they interact in markets