Microeconomics Chapter 1

What is economics? What do these resources include (both tangible and intangible)

"the study of how people, individually and collectively, manage resources. Resources includes tangible (cash, gold...) & intangibles (time, job experience...)

What are the four questions economists ask/think about problems,issues,life?

1. what are the wants & constraints of those involved, 2. what are the trade offs, 3. how will others respond, 4. are resources being allocated the best way possible?

What is reverse causality?

A situation in which one variable is said to cause another variable, when in reality the reverse is true.

How did the Grameen bank deal with incentives?

Group responsibility- it required borrowers to apply for loans in 5 person groups, if one person did not repay the bank then none of them could borrow again.

What are resources? Give examples

anything that can be used to make something of value, from natural resources (water, sunlight....) to human resources (knowledge...)

What is marginal decision making?

comparison of the additional benefits of a choice against the additional costs it would bring.

Decisions often involve weighting the trade offs between _____ & ______

costs & benefits

What is a negative incentive? Give an example.

makes someone less likely to do something. Ex: charging more for a latte will cause people to not buy it because it is a higher opportunity cost

What does a positive incentive do? Give an example.

makes someone more likely to do something. Ex: lowering price of a latte will make you want to buy it because the opportunity cost is lower because you have fewer things you could spent the money on

What is rational behavior?

making choices to achieve goals in the most effective way possible

What is the main idea behind Question 1 economists ask?

people want a lot of things but are constrained by limited resources

What is an incentive?

something that causes people to behave in a certain way by changing trade offs

What is microeconomics?

the study of how individuals and firms make decisions

What is macroeconomics? What does it examine?

the study of how the economy as a whole creates and distributes wealth. It examines GDP, inflation, unemployment, economic growth, inequality

What is scarcity? What are some common examples?

wanting more than what we can get with available resources. Ex: money,time,land.

What were the trade-offs involved in making a loan to the villagers?

Banks perceived the villagers as risky clients so the opportunity cost of making a small loan to them outweighed the benefit

What are the wants & constraints of traditional Bangladeshi banks and poor villagers? Does this help explain why villagers did not have access to credit?

Banks: want to make profits by lending money to people who will repay them back with interest, but they are constrained by having limited funds available to lend and needing to pay employees/branch expenses. Villagers: want to increase their incomes, but are constrained by their ability to borrow money Therefore, banks wanted to earn profits and managed their constrained funds to prioritize those who would be profitable customers

What is correlation? What is causation?

Correlation is when two variables have a consistent relationship. Causation is when one variable causes another.

Who started the Grameen Bank in Bangladesh? What did it do? What is it like today?

Mohammad Yunus, it offered small loans to poor people who previously had no access to credit. Today is it a profitable bank, there is about 8 million customers and 98% of the loans get repaid

What is efficiency?

Use of resources to ensure that people get what they most want and need given the available resources.

What is a sunk cost? What do economists think about these costs?

a cost that has already been incurred & can't be recovered or refunded. That you should ignore sunk costs when making a decision.

Economics is the art of ____

household management

What is the neoclassical definition of economics? Who started it and what idea did it revolve around?

the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. Revolve around the idea of scarcity - began w/ Robbins in 1930s

What is opportunity cost?

the value of what you have to give up in order to get something; the value you could have gained by choosing the next-best alternative.

What is omitted variable bias?

when two variables are correlated together because both are caused by the same underlying factor