Alexandrea's Econ (Topic 1)
Economics
the social science that studies how people make decisions in the face of scarcity and the resulting impact of such decisions on both society as a whole and its individual members
Social Science
central focus of study is how people behave and interact with each other
Scarcity
a universal phenomenon that arises because resources (e.g., time, household income, amount of labor in economy) are available in finite, limited amounts
scarcity of resources implies that people confront tradeoffs
having more of one thing means getting by with less of something else
Microeconomics
branch of economics which studies how individual decision makers behave and interact with each other (often with a focus on how households and firms behave and interact with each other in markets)
Macroeconomics
branch of economics which studies the functioning and performance of a society’s “economy as a whole” (often with a focus on levels of and changes in aggregate measures such as the unemployment rate, inflation rate, and Gross Domestic Product)
microeconomics focuses on
individual units (e.g. person, firm, market, etc.)
macroeconomics focuses on
on the aggregate economy (e.g., national productivity, overall price level, etc.)
Positive Statement
a claim that attempts to describe how the world actually is or how the world actually functions
Normative Statement
a claim that attempts to assess the desirability of how the world is or functions, perhaps with suggestions of things that could be done to improve matters
Rational Decision Maker
someone with a well-defined goal, who takes actions to achieve the goal as best as possible.
TOTAL BENEFITS
The sum of all gains that a person realizes from an action or outcome
TOTAL COSTS
The sum of all burdens that a person incurs from an action or outcome
Total Economic Surplus
is defined as the difference between Total Benefits and Total Costs
Total Economic Surplus formula
Total Economic Surplus= Total Benefits-Total Costs
Goal of a rational decision maker is
to Maximize Total Economic Surplus
Cost-Benefit Principle
a rational decision maker should undertake an action if and only if the Marginal (or additional) Benefit of doing so is greater than the Marginal (or additional) Cost of doing so.
Marginal Benefit
the change in the value of total benefits as more of an activity is undertaken
Marginal Cost
the change in the value of total costs as more of an activity is undertaken
Incentive Principle
– (i) if the marginal benefit of an activity increases, then a rational person will engage in more of the activity, -and- (ii) if the marginal cost of an activity increases, then a rational person will engage in less of the activity
Self-Interested Individual
someone who makes their own personal assessment of the benefits and costs associated with different outcomes and who subsequently uses these measures as the basis for decision making