Chapter 1 Key Terms Fall 2020

Chapter 1: Scarcity-forces-tradeoff principle

.Definition: The idea that limited resources force people to make choices and face tradeoffs when they choose. Sentence: Scarcity-forces-tradeoff principle is also known as limited resources force people to make choices and trade-offs when they choose. Analysis: You are giving up one thing to get another that you want even more. The scarcity-forces-tradeoffs principle reminds us that limited resources force people to make choices and face trade-offs when they choose.

Chapter 1: Curve

Definition: A line representing data points on a graph. Sentence: His finger left her jaw and softly followed the curve of her neck. Analysis: Once the data in the table are plotted as a set of points in the coordinate system, the points can be joined to form a curve. A curve is any line representing data points plotted on a graph.

Chapter 1: Scientific method

Definition: A method of rational inquiry with six steps: (1) posing a question, (2) researching the question, (3) developing a hypothesis, (4) conducting studies and collecting data, (5) analyzing the data, and (6) evaluating the hypothesis. Sentence: It is certainly the most scientific method of steam-heating, and heat can be made to travel a greater distance by its aid than by any other means. Analysis: You are no doubt familiar with the first tool, which you probably began learning in elementary school. The scientific method involves posing a question, researching the question, developing a hypothesis, conducting studies and collecting information, analyzing the information, and then evaluating the hypothesis. You may have applied the scientific method by growing bean plants, examining bacteria under a microscope, or measuring waves in a wave tank.

Chapter 1: Economic enigmas

Definition: A puzzle or riddle that may be explained through economic analysis. Sentence: An economic enigma is a sometimes comical question asked about an odd occurrence in the economy. Analysis: These economic enigmas are puzzles or riddles that might be explained through an economic analysis. For economist Steven Landsburg, finding and solving such mysteries is what economics is all about.

Chapter 1: Variable

Definition: A quantity that can vary, or change. Sentence: It is a matter of common observation that the blue of the sky is highly variable. Similarly the substance we call wine is undeniably variable in composition. Analysis: One or both sets of data are also known as variables. A variable is a quantity that can vary or change.

Chapter 1: Economic model

Definition: A simplified representation of reality that allows economists to focus on the effects of one change at a time. Sentence: The alliance has promised not to alter the country's basic economic model. Analysis: Economists use models to help them understand how the world works. An economic model is a simplified representation of reality that often allows economists to focus on the effects of one change at a time. Models also help economists structure their thinking. A model can take the form of an equation, a computer program, or a diagram. It can also consist mainly of a written description.

Chapter 1: Economy

Definition: A system used to manage limited resources for the production, distribution, and consumption of goods and services. Sentence: The economy was affected by the establishment of a land tax. Analysis: In his book, Smith argued that competition is the key to a healthy economy. Nations prosper when buyers and sellers are free to do business in the marketplace without government interference.

Chapter 1: Graph

Definition: A visual representation of the relationship between two sets of data. Sentence: Elements of the graph are shown from an axis through 0 and at right angles to OX. Analysis: Graphs are useful tools for analyzing and displaying data. A graph is a visual representation of the relationship between two given sets of data. One or both sets of data are also known as variables.

Chapter 1: Invisible hand

Definition: Adam Smith's metaphor to explain how an individual's pursuit of economic self-interest can promote the well-being of society as a whole. Sentence: The market is guided by an invisible hand a price adjustment mechanism to an equilibrium state. Analysis: Just how markets do all this coordination was not clear to people in Adam Smith's day. He used the metaphor of an invisible hand guiding human affairs to explain this mystery. On your road trip, you feel the invisible hand at work when you visit a supermarket.

Chapter 1: Adam Smith and The Wealth of Nations

Definition: An Inquiry into the Nature and Causes of the Wealth of Nations generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith. Sentence: Adam Smith's publication of The Wealth of Nations in 1776 brought a modern era to the economies. Analysis: Smith's book was published in 1776, the same year the Declaration of Independence was written. The connection between The Wealth of Nations and the Declaration does not stop there.

Chapter 1: Market

Definition: An arrangement that brings buyers and sellers together to do business with each other. Sentence: There is a large weekly market for grain, and annual horse and cattle fairs. Analysis: When you think of markets, you probably conjure up the image of a supermarket or farmers market. Economists take a more expansive view of markets. To them, a market is any arrangement that brings buyers and sellers together to do business with each other. A market can exist in a single place, like a weekend flea market. Or it can exist in cyberspace, such as an online auction site.

Chapter 1: Resource AKA as input/(Factors of Production)

Definition: Anything used to produce an economic good or service. Sentence: It was only as a last resource that she tried literature. Analysis: An economy is a system of institutions and organizations that either help facilitate or are directly involved in the production and distribution of goods and services. Economic resources are the inputs we use to produce and distribute goods and services.

Chapter 1: Cost-benefit analysis

Definition: Away to compare the costs of an action with the benefits of that action; if benefits exceed costs, then the action is worth taking. Sentence: He undertook a cost-benefit analysis of a growing operation using an average-size house with 100 plants. Analysis: To calculate costs and benefits, economists use a tool known as a cost-benefit analysis. This analysis might begin with a formal listing of the costs and benefits involved in a choice.

Chapter 1: Incentive

Definition: Something that motivates a person to take a particular course of action. Sentence: The rising cost of electricity provides a strong incentive to conserve energy. Analysis: As we have seen, costs and benefits influence our behavior. That is, they act as an incentive, something that motivates a person to take a particular course of action.

Chapter 1: Marginal cost

Definition: That is given up by adding one more unit to an activity. Sentence: Tthe high fixed costs make the marginal cost of adding passengers on a partially-filled flight almost negligible. Analysis: Making decisions at the margin involves comparing marginal costs and benefits. The marginal cost is what you give up to add one unit to an activity.

Chapter 1: Ceteris paribus

Definition: The assumption, used in economic models, that all factors other than those being considered remain the same; from a Latin expression meaning "other things being equal" Sentence: We relied on ceteris paribus to give our equation the most useful for its future presentation to the board of directors. Analysis: Faced with these missing factors, the economist shrugs and says, "Ceteris paribus," which is Latin for "other things being equal" or "other relevant factors remaining unchanged." This is the economist's way of saying, "Let's focus on understanding what happens if we change one aspect of the mystery and keep all other aspects the same." The economist thinks, "Maybe if I can understand this one aspect, I can begin to understand the larger mystery." The point of economic models is to aid in examining economic effects, one change at a time, and in making predictions about the consequences of that change.

Chapter 1: Normative economics

Definition: The branch of economics that makes value judgments about the economy; its focus is on which economic policies should be implemented. Sentence: The normative economics discussion began to cross the line into philosophy so we decided to interrupt the meeting to get back on topic. Analysis: Having laid out the choices and their possible impacts, the analyst would then make a recommendation to the board on where to cut costs. This type of analysis, which focuses on how things ought to be done, is known as normative economics.

Chapter 1: Positive economics

Definition: The branch of economics that uses objective analysis to find out how the economy actually works. Sentence: Positive economics deals with objective explanation and the testing and rejection of theories. Analysis: To answer the first question, the economic analyst would gather facts about the number of new classes needed to cope with rising enrollment, the salaries of school employees, maintenance costs, and other expenses. This type of analysis, which describes how things are, is known as positive economics.

Chapter 1: Scarcity

Definition: The condition that results because people have limited resources but unlimited wants. Sentence: Through the resultant scarcity of labor, much land fell out of cultivation. Analysis: This first principle recognizes that although our desires for things are unlimited, the resources needed to fulfill our desires are scarce. Because of this scarcity of resources, there will never be enough of everything to satisfy everyone completely.

Chapter 1: Tradeoff

Definition: The exchange of one benefit or advantage for another that is thought to be better. Sentence: I had to make a trade-off between getting a good night's sleep and staying up late to finish his research project. Analysis: We will always be forced to make choices as to what we want most. Whenever you choose one thing over another, you are making a tradeoff. You are giving up one thing to get another that you want even more.

Chapter 1: Law of unintended consequences

Definition: The general observation that the actions of people and governments always have effects that are not expected or intended. Sentence: The law of unintended consequences may come into play as well. But the pressure for Palestinian reform may be having unintended consequences. Analysis: The result of the Vermont law was an example of what economists call the law of unintended consequences. This law says that the actions of people and governments always have effects that are not expected, or that are "unintended." Economists spend much of their time trying to predict these unintended consequences.

Chapter 1: Future-consequences-count principle

Definition: The idea that decisions made today have effects in the future. Sentence: Future Consequences Count tells us that decisions made today have consequences not only for today but also in the future. Analysis: In general, people are shortsighted. They tend to make decisions by looking only at the immediate costs and benefits. But decisions made today often have longer-term effects that should also be considered. The future-consequences-count principle tells us that decisions made today have consequences not only for today but also in the future.

Chapter 1: No-free-lunch principle

Definition: The idea that every choice involves tradeoffs; a restatement of the scarcity-forces-tradeoffs principle. Sentence: As the no free lunch principle states that by doing something, you forgo the opportunity to do something else. Analysis: Economists have another name for the scarcity-forces-tradeoffs principle: the no-free-lunch principle. This name stems from the observation that every choice—even that of accepting a free lunch—involves tradeoffs.

Chapter 1: Thinking-at-the-margin principle

Definition: The idea that many decisions involve choices about using or doing a little more or a little less of something rather than making a wholesale change. Sentence: Marginal thinking is thinking about how many extra resources are worth it. Analysis: The thinking-at-the-margin principle tells us that most of the decisions we make each day involve choices about a little more or a little less of something rather than making a wholesale change.

Chapter 1: Markets-coordinate-trade principle

Definition: The idea that markets are usually the best way to coordinate exchanges between buyers and sellers. Sentence: Markets coordinate trade is when markets do better than anyone or anything else at coordinating exchanges between buyers and sellers. Analysis: When markets operate freely, or with limited government interference, buyers and sellers can trade with each other until both are satisfied with their sales and purchases. The result is an efficient market that serves everyone's interests without guidance from a person or an institution. The markets-coordinate-trade principle states that markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers.

Chapter 1: Rational behavior model

Definition: The idea that people behave in ways that are based on reason and self-interest. Sentence: A person chooses a job with a profile of his liking instead of a high paying job, then it would be also termed as rational behavior. Analysis: One widely accepted descriptive model is called homo economics. This is Latin for "economic man," although it applies to all human beings. It is also called the rational-behavior model. This model is a tool for understanding the mystery of human behavior. It theorizes that people behave in ways that are rational, or based on reason.

Chapter 1: Trade-makes-people-better-off principle

Definition: The idea that people benefit by focusing on what they do well and then trading with others, rather than trying to do everything for themselves. Sentence: Focusing on what we do well and then trading with others we will end up with more and better choices. Analysis: As Smith understood, none of us is equally skilled at doing everything. Nor should we try to be. It makes more sense to concentrate on what we do best and then trade with others for what they do best. The trade-makes-people-better-off principle tells us that by focusing on what we do well and then trading with others, we will end up with more and better choices than by trying to do everything for ourselves.

Chapter 1: Cost-versus-benefits principle

Definition: The idea that people choose something when the benefits of doing so outweigh the costs. Sentence: The cost-benefit principle or cost-benefit relationship states that the cost of providing financial information in the financial statements must not outweigh the benefit of that information to the users. Analysis: The costs-versus-benefits principle tells us that people choose something when the benefits of doing so are greater than the costs.

Chapter 1: Incentives matter principle

Definition: The idea that people respond to incentives in generally predictable ways. Sentence: In market-based economies, prices send signals that act as incentives to buyers and sellers, changing their behavior that is, the amount of a good or service they are willing to purchase or to offer for sale. Analysis: The incentives-matter principle simply says that people respond to incentives in generally predictable ways.

Chapter 1: Economics

Definition: The study of how people choose to use their limited resources to satisfy their unlimited wants. Sentence: As my economics professors insisted, the cost is determined by scarcity and demand. Analysis: In fact, over the past two centuries, some of the world's best thinkers have wrestled with it. Their answers have generated many of the ideas and principles at the heart of social science we call economics.

Chapter 1: Microeconomics

Definition: The study of the economy at the level of individuals, households, and businesses. Sentence: Transport Economics Transport Economics as a branch of applied microeconomics has a long and venerable history. Analysis: Economists divide their study of how people use their scarce resources into two main branches. Microeconomics looks at economic decision making by individuals, households, and businesses.

Chapter 1: Macroeconomics

Definition: The study of the workings of the economy as a whole. Sentence: It is only the last part of the book covering macroeconomics that the deficiencies become glaring. Analysis: Macroeconomics focuses on the workings of an economy as a whole.

Chapter 1: Marginal benefit

Definition: What is gained by adding one more unit to an activity. Sentence: You can launch rockets from balloons and aircraft, but it's only of marginal benefit. Analysis: The marginal benefit is what you gain by adding one more unit. Suppose you have just spent two hours studying for an economics test.

Chapter 1: Benefits

Definition: What is gained from something in terms of money, time, experience, or other improvements. Sentence: There are many financial benefits to owning your own home. Analysis: The benefits are what you gain from something in terms of money, time, experience, or other improvements in your situation.

Chapter 1: Costs

Definition: What is spent in money, effort, or other sacrifices to get something. Sentence: I swear I'll stop here even if it costs me my life. Analysis: Economists assume that individuals make choices based on the expected costs and benefits. The costs of something are what you spend in money, time, effort, or other sacrifices to get it.