Chapter One Economics

Cost-Benefit Analysis

A way to compare the costs of an action with the benefits of that action. If benefits exceed costs, then the action is worth taking.

Incentive

Any factor that encourages or motivates a person to do something. Prices, taxes, and laws create incentives that influence how people behave.

Trade-makes-people-better-off Principle

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.

Future-consequences-count Principle

Decisions made today have consequences not only for today but also in the future.

Macroeconomics

Focuses on the workings of an economy as a whole.

Microeconomics

Looks at economic decision making by individuals, households, and businesses.

Markets-coordinate-trade Principle

Markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers.

Incentives-matter Principle

People respond to incentives in generally predictable ways.

Normative Economics

The branch of economics that applies value judgements to data in order to recommend actions or policies. The goal is to advise how things ought to be done.

Normative Economics

The branch of economics that applies value judgements to the data in order to recommend actions or policies. The goal is to advise how things ought to be done.

Positive Economics

The branch of economics that uses objective analysis to find out how the world works. The goal is to describe how things are.

Scarcity

The condition that results because people have limited resources but unlimited wants.

Tradeoff

The exchange of one benefit or advantage for another that is thought to be better. Whenever you choose one thing over another, you are making a tradeoff.

Thinking-at-the-margin Principle

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 it a wholesale change.

No-free-lunch Principle

This name stems from the observation that every choice-even that of accepting a free lunch-involves tradeoff. Even if the lunch was free to you, someone had to pay for the meal.