Economics Chapter 1 Key Terms
Chapter 1 Page 1 Economy Example: the Stock Market System in the United States
Def: A system used to manage limited resources for the production, distribution, and consumption of goods and services Sentence: America's economy flourished as a result of the World Wars. Connections: 1) Economics 2) Macroeconomics
Chapter 1 Page 3 Invisible hand Example: Milk and eggs are most likely to be sold at grocery stores because a majority of people buy milk and eggs
Def: 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 invisible hand can be seen at work in the amount of good exports internationally. Connections: 1) Market 2) Markets-coordinate-trade principle
Chapter 1 Page 1 Adam Smith and The Wealth of Nations
Def: a Scottish political economist and philosopher who is widely known for his book, The Wealth of Nations (1776). In his book, Smith argued that competition is the key to a healthy economy. Sentence: The Wealth of Nations by Adam Smith is a renowned book amongst economists and philosophers, since it is one of the first books to discuss economic principles. Connection: 1) Economics 2) Invisible hand 3) Economic Enigma
Chapter 1 Page 4 Curve Example: the curve of an income/education study showed that the more educated someone was, the more they made
Def: a line representing data points on a graph Sentence: If a graph has plotted points connected by a line, then it has a curve. Connections: 1) graph 2) variables
Chapter 1 Page 4 Scientific method Example: examining bacteria under a microscope
Def: 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: While the Scientific method is a vital tool in Economics, it can also be applied to experiments from other social, natural, and environmental sciences. Connections: 1) Positive economics 2) Economic Enigmas 3) Variables
Chapter 1 Page 2 Economic enigmas Example: Why does buying popcorn at a movie theater cost more than buying popcorn at a grocery store?
Def: a puzzle or riddle that may be explained through economic analysis Sentence: Economist Steven Landsburg believes that finding and solving economic enigmas make up the core of the social science. Connections: 1) Scientific method 2) Variable
Chapter 1 Page 4 Variable Example: Income and Education levels
Def: a quantity that can vary, or change. Sentence: Variables are often compared to each other in a two-dimensional graph. Connections: 1) graph 2) curve
Chapter 1 Page 4 Economic model Example: an equation, a computer program, or a diagram
Def: a simplified representation of reality that allows economists to focus on the effects of one change at a time Sentence: By using an economic model, economists are aided in explaining and predicting how an economy operates. Connections: 1) Macroeconomics 2) Scientific Method
Chapter 1 Page 1 Economics Example: Economists study Supply and Demand
Def: a social science that studies how people choose to use their limited resources to satisfy their unlimited wants Sentence: If you have a lot of possessions in addition to basic necessities, than you are rich from an economic viewpoint. Connections: 1) Economy 2) Economic Enigmas 3) Resource
Chapter 1 Page 4 Graph Example: Level of Education (x) vs. Income (y) Line graph
Def: a visual representation of the relationship between two given sets of data. Sentence: Graphs are a versatile tool that can be used to show a relationship between two different sets of information. Connections: 1) Variables 2) Curve
Chapter 1 Page 3 Cost-benefit analysis Example: Sleeping an hour longer on a school day may cost a student less study time, but it may give a student more energy and needed rest. Rational choice: the benefits are greater than the costs
Def: 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. Sentence: One way an economist may perform a cost-benefit analysis is by listing the costs and benefits of a choice. Connections: 1) Costs 2) Benefits 3) Cost-versus-benefit principle
Chapter 1 Page 3 Market Example: A weekend flea market
Def: an arrangement that brings buyers and sellers together to do business with each other Sentence: An online auction on Ebay is a prime example of an intangible market. Connections: 1) Markets-coordinate-trade principle 2) invisible hand
Chapter 1 Page 2 Resource AKA as input/(Factors of Production) Example: Trees are used to make paper, build houses, and fuel fires.
Def: anything used to produce an economic good or service. Resources can be limited, or scarce, because they exist in finite amounts. Sentence: Time and energy are limited resources to consider when choosing your class schedule and extracurriculars. Connections: 1) Economics 2) Market 3) Scarcity
Chapter 1 Page 4 Ceteris paribus Example: The Income vs Graph didn't account for the slow winters that put pressure on construction workers and farmers (who had jobs that didn't require much education)
Def: 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: Ceteris paribus is a mentality that can aid economists in focusing on one variable's effect at a time. Connections: 1) economic model 2) Scientific Method
Chapter 1 Page 2 Normative economics Example: An economic analyst looking into a school board's budget cuts and then advising them what choices would be beneficial for cutting costs.
Def: the branch of economics that makes value judgments about the economy; its focus is on which economic policies should be implemented Sentence: In normative economics, economists, like government officials, make subjective recommendations . Connections: 1) Positive Economics 2) Macroeconomics 3) Incentives
Chapter 1 Page 2 Positive economics Example: An economic analyst figuring out how increased salaries and enrollment will affect a school year's budget by looking into the school's expenses.
Def: the branch of economics that uses objective analysis to find out how the economy actually works Sentence: Positive economics focuses on analyzing the economy's functions objectively. Connections: 1) Normative Economics 2) Scientific Method
Chapter 1 Page 3 Scarcity Example: Gold having an inflated cost due to its rarity
Def: the condition that results because people have limited resources but unlimited wants Sentence: When the pandemic began to break out, toilet paper became a scarcity because people frantically bought it all. Connections: 1) Resources 2) Tradeoffs
Chapter 1 Page 3 Tradeoff Example: Choosing to focus on the SAT and your grades rather than getting a job
Def: the exchange of one benefit or advantage for another that is thought to be better Sentence: At breakfast, I tradeoff eating boring cereal for tasty cake. Connections: 1) Scarcity 2) No-free-lunch principle 3) Scarcity-forces-tradeoff principle
Chapter 1 Page 3 Law of unintended consequences Example: Your insurance goes up because your speed limit ticket
Def: the general observation that the actions of people and governments always have effects that are not expected or intended Sentence: The stay-at home orders is a prime example of the law of unintended consequences; people panicked and cleared shelves of their stock. Connections: 1) Future-consequences-count principle 2) Incentives
Chapter 1 Page 3: Future-consequences-count principle Example: Law in Vermont that prohibited billboards to protect natural scenery caused businesses to build sculptures to attract people's attention
Def: the idea that decisions made today have effects in the future Sentence: People generally only keep the short-term effects in their mind when making decisions, instead of the future-consequences-count principle. Connections: 1) Law of unintended consequences 2) Incentives
Chapter 1 Page 3 No-free-lunch principle Example: Your free lunch costed someone else to pay for the meal, which costed them to make a tradeoff.
Def: the idea that every choice involves tradeoffs; a restatement of the scarcity-forces-tradeoffs principle Sentence: The no-free-lunch principle makes you realize how nothing in the world is free; you have to make sacrifices and work hard for what you have. Connections: 1) Scarcity-forces-tradeoffs principle 2) tradeoffs 3) Scarcity
Chapter 1 Page 3 Scarcity-forces-tradeoff principle Example: I am forced to stay in French 1 because Spanish 1 is full.
Def: the idea that limited resources force people to make choices and face tradeoffs when they choose Sentence: The scarcity-forces-tradeoffs principle dictated my choice to eat the last slice of pizza over bland cereal. Connections: 1) tradeoffs 2) resources 3) scarcity
Chapter 1 Page 3: Thinking-at-the-margin principle Example: Choosing to eat another scoop of ice cream
Def: 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: The thinking-at-the-margin principle tells me that my day is mostly comprised on choices like if I want to sleep an extra hour or not. Connections: 1) Marginal cost 2) Marginal benefit 3) margin
Chapter 1 Page 3 Markets-coordinate-trade principle Example: Fruits and vegetables exported from different regions around the world
Def: the idea that markets are usually the best way to coordinate exchanges between buyers and sellers Sentence: The markets-coordinate-trade principle affirms how government interference in commerce is unproductive. Connections: 1) market 2) invisible hand
Chapter 1 Page 4 Rational behavior model Example: I walk to my fridge when I'm hungry so I can get food to feed myself.
Def: the idea that people behave in ways that are based on reason and self-interest Sentence: Though the rational behavior model could help provide insight into our actions, it doesn't accurately account for all types of behavior. Connections: 1) Invisible hand 2) Incentives matter principles
Chapter 1 Page 3 trade-makes-people-better-off principle Example: trading concert tickets in exchange for a new car battery on a road trip
Def: 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: The trade-makes-people-better-off principle tells us that focusing on what we're best at and trading with others is a better life choice. Connections: 1) Incentive 2) Markets-coordinate-trade principle
Chapter 1 Page 3 Cost-versus-benefits principle Example: Students deciding to do easy extra credit to raise their grade
Def: the idea that people choose something when the benefits of doing so outweigh the costs Sentence: Subconsciously, I followed the cost-versus-benefits principle and applied for club officer because there was nothing to lose. Connections: 1) Cost 2) Benefits 3) Cost-benefit principle
Chapter 1 Page 3 Incentives matter principles Example: Being fined $150 for going 5 miles over the speed limit makes you more cautious of your speed while driving
Def: the idea that people respond to incentives in generally predictable way Sentence: The incentives matter principles is based on our perception of costs and benefits, as well as our desires. Connections: 1) Incentives 2) Costs 3) Benefits
Chapter 1 Page 2 Microeconomics Example: The housing market of a particular city/neighborhood
Def: the study of the economy at the level of individuals, households, and businesses Sentence: In Microeconomics, an economist focuses only on the economic decisions of individuals or small groups of people. Connections: 1) Macroeconomics 2) Economic model
Chapter 1 Page 2 Macroeconomics Example: Tackles issues like Unemployment and Inflation
Def: the study of the workings of the economy as a whole Sentence: In Macroeconomics, an economist focuses on an entire economy's decisions exclusively. Connections: 1) Microeconomics 2) Economy
Chapter 1 Page 3 Marginal benefit Example: Being more prepared because you studied an extra hour for an Economics test
Def: what is gained by adding one more unit to an activity Sentence: The marginal benefit of sacrificing my recreational time was that I could finish my Economics homework. Connections: 1) Marginal cost 2) Thinking-at-the-margin principle 3) margin
Chapter 1 Page 3 Benefits Example: Being a rewards member at my favorite store meant cashing in double the points!
Def: what is gained from something in terms of money, time, experience, or other improvements Sentence: The benefit of picking up a second job was the increased wage. Connections: 1) Cost 2) Cost-benefit-analysis 3) Cost-versus-benefits principle
Chapter 1 Page 3 Marginal cost Example: Being less well-rested when studying an extra hour for an Economics test.
Def: what is given up by adding one more unit to an activity Sentence: My marginal cost was dropping my hour of recreation time so I could finish my Economics homework. Connections: 1) Marginal benefit 2) Thinking-at-the-margin-principle 3) margin
Chapter 1 Page 1 Costs
Def: what is spent in money, effort, or other sacrifices to get something Sentence: My passion to become a professional napper was the cost for good grades. Connections: 1) Benefits 2) Cost-versus-benefits principle 3) Cost-benefit analysis
Chapter 1 Page 3 Incentive Example: Extra credit assignments that raise your grade
Definition: something that motivates a person to take a particular course of action (positive and negative) Sentence: Governments use negative incentives to deter citizens from breaking crimes Connections: 1) Incentive-matters principle 2) Costs 3) Benefits
