Chapter 1

Six ideas that define the economic way of thinking

1. A choice is a tradeoff. 2. People make rational choices by comparing costs and benefits. 3. Benefit is what you gain from something 4. Cost is what you must give up to get something 5. Most choices are "how much" choices made at the margin. 6. Choices respond to incentives

Trade-off

An exchange-giving up one thing to get something else.

Choices made in Self Interest

Choices that are best for the individual who makes them.

Choices made in Social Interest

Choices that are made that are best for society as a whole.

Making a choice at the margin

Comparing the relevant alternatives systematically and incrementally.

Economic Model

Description of some feature of the economic world that includes on those features assumed necessary to explain the observed facts. In economics we use mathematical and graph based models.

Normative Statements

Disagreements that cannot be settled by facts-statements about what ought to be. These statements depend on values and cannot be tested. "we ought to cut back on our use of coal" is a normative statement. You may agree or disagree with it, but you can't test it. Economists try to avoid normative statements.

For Whom?

For whom are the services going to be produced? Usually depends on the income of the household.

How?

How are the goods and services going to be produced?

First big question that provide a useful summary of the scope of economics

How do choices end up determining what, how, and for whom goods and services get produced?

What fact is the source of all economic questions and problems?

Human wants exceed the resources available to satisfy them.

Macroeconomics

Is the study of the aggregate or total effect on the national economy and the global economy of the choices that individuals, businesses, and governments make.

Statistical Investigation

Looks for a correlation- a tendency for the values of two variables to move together (either in the same direction or opposite directions) in a predictable and related way. For example, cigarette and lung cancer are correlated.

Rational Choice

Marginal benefit exceeds or equals marginal cost.

Goods and Services

Objects and actions that people value and produce to satisfy human wants.

Scarcity

Our inability to satisfy all of our wants.

Natural Experiment

Situation that arises in the ordinary course of economic life in which one factor of interest is different and other things are equal or similar. For example, Canada has higher unemployment benefits that the United States, but the people in the two nations are similar. So to study the effect of unemployment benefits on the unemployment rate, economist might compare Canada to the United States.

Positive Statements

Statements about what is. Positive statements may be right or wrong and can be proven by careful observation of facts. "our planet is warming because of the quantity of coal that we're burning" is a positive statement.

Benefit

The benefit from something is that gain or pleasure that it brings determined by personal preferences-by what person likes and dislikes and the intensity of those feeling. Economists measure benefit as the most that a person is willing to give to get something.

Marginal Benefit

The benefit on a one-unit increase in an activity. Marginal benefit is what you gain from having one more unit of something. The marginal benefit of something is measured by what you are willing to give up to get one additional unit of it. Marginal benefit always diminishes.

Opportunity Cost

The best alternative that must be given up to get something.

Marginal Cost

The opportunity cost of a one-unit increase in an activity. The marginal cost of something is what you must give up to get one additional unit of it. The marginal cost of any activity increases as you do more of it.

Economics

The social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them.

Microeconomics

The study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments.

What?

What goods and services are going to be produced?

Second big question that provide a useful summary of the scope of economics

When do choices made in the pursuit of self-interest also promote the social interest?

When is the pursuit of self interest in the social interest?

When one acts in their best interest it turns out to be best in the social interest.

Rational Choice

a choice that uses the available resources to best achieve the objective of the person making the choice. Only the wants and preferences of the person making a choice are relevant to determine it rationality. The idea of rational choice provides an answer to the first economic question: What goods and services will be produced and in what quantities. The answer is: The goods and services that people rationally choose to buy. But how do people choose rationally? We make rational choices by comparing costs and benefits.

Incentive

a reward or a penalty that encourages or discourages an action. a change in marginal benefit or a change in marginal cost changes the incentives that we face and lead us to change our actions. a central idea of economics is that by observing changes in incentive, we can predict how choices change.