Chapter 1

Economics

The study of how people make choices under conditions of scarcity and of the results of those choices for society.

Macroeconomics

The study of the performance of national economies and the policies that governments use to try to improve that performance.

Positive Economic Principle

Predicts how people will behave.

Original Economic Problem

Producing enough food to avoid starvation.

Normative Economic Principle

Says how people should behave.

Core Principles of Economics

Scarcity Principle and The Cost-Benefit Principle

Economic Naturalist

Someone who uses insights from economics to help make sense of observations from everyday life.

Rational or Rational Person

Someone with well-defined goals who tries to fulfill those goals as best he or she can.

Marginal Benefit

The increase in total benefit that results from carrying out one additional unit of an activity.

Marginal Costs

The increase in total cost that results from carrying out one additional unit of an activity

Scarcity Principle

AKA No-Free-Lunch Principle: Although we have needs and wants, the resources available to us are limited. So having more of one good thing usually means less of another.

Incentive Principle

A person ( or a firm or a society) in more likely to take an action if its benefits rises, and less likely to take it if its cost rises.

3 Important Decision Pitfalls

1. Measuring costs and benefits as proportions rather than absolute dollar amounts. 2. Ignoring implicit costs. 3. Failure to think at the margin.

Malthus' Essay

1. People need food to live 2. Producing people is easy 3. Producing food is hard

The Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Economic Surplus

The difference between the benefits and the costs.

Microeconomics

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.

Average Benefit

The total benefit of undertaking N units of an activity divided by N.

Average Cost

The total cost of undertaking N units of an activity divided by N.

Opportunity Cost

The value of what must be forgone to undertake an activity