chapter 1: economic foundations and models

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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


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