Economics: the study of the choices people make to attain their goals, given their scarce resources.
Economic model: A simplified version of reality used to analyze real-world economic situations.
Market: a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
Markets three important ideas:1.people are rational 2.People respond to economic incentives. 3.Optimal decisions are made at the margin.
Marginal analysis:Analysis that involves comparing marginal benefits and marginal costs..
Trade-off: the idea that because of scarcity, producing more of one good or service means producing less of another good or service.
Opportunity cost: the highest-valued that must be given up to engage in an activity.
Three fundamental questions:1. What goods and services will be produced? Consumers, firms, and the government face the problem of scarcity by trading off on good or service for another. 2. How will the goods and services be produced? Firms may need to choose between a production method in the united state that uses fewer workers and more machines and a production method in china that uses more workers and fewer machines. 3. Who will receive the goods and services produced? People are willing to give up some of their income-and, therefore, some of their ability to purchase goods and services- by donating to charities to increase the incomes of poorer people.
Centrally planned economy: An economy in which the government decides how economic resources will be allocated.
Market economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources.
Mixed economy : an economy in wich most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
Productive efficiency: A situation in which a good or service is produced at the lowest possible cost.
Allocative efficiency: A state of the economy in wich production is in accordance with 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 it.
Voluntary exchange: a situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.
Equity: the fair distribution of economic benefits.
Develop a model: 1.decide on the assumptions to use in developing the model. 2.formulate a testable hypothesis. 3.use economic data to test the hypothesis. 4.revise the model if it fails to explain the economic data well. 5. Retain the revised model to help answer similar economic questions in the future.
Economic models make behavioral assumptions about the motives of consumers and firms.
Economic variable: something measurable that can have different values, such as the incomes of doctors.
Positive analysis: Analysis concerned with what is.
Normative analysis: Analysis concerned with what ought to be.
As a social science, economics considers human behavior- particularly decision- making behavior-in every context, not just in the context of business.
Positive economic analysis can show the consequences of a particular policy, but it cannot tell us whether the policy is “good” or “bad” so, the statement at the beginning of this box is inaccurate.
Microeconomics: the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Macroeconomic: the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
Important economic terms: entrepreneur, innovation,technology, firm company or business, goods, services, revenue, profit, household,