Chapter 1What is Economics?-the study of how we make choices under scarcity1. Choice-selecting something among alternatives2. Scarcity-concept that there is less of a good available than people would like ex. money, time, textbooksa. Rationing-allocating scarce goods to those who want themb. Price is used to ration goodsc. Leads to competitive peopleResources: A input used to produce an economic gooda. Human resourcesb. Physical resourcesc. Natural resourcesCapital: human-made resources used to produce other goods and servicesEconomic Thinking1. Resources are scarce so there are trade-offs2. Opportunity costs-the highest valued alternative that must be sacrificed when choosing a optiona. Hour of your time3. individuals are rational-they try to get the most from their limited resources, what is rational for one might be different for another4. incentives matter: choice is influenced in way by changing incentivesa. prices5. people make decisions at the margina. marginal: describes effect of a change in the current situation6. cost benefit analysis: one will undergo an action when marginal benefits outweigh the marginal costs7. information is costly but helpful8. generate indirect and direct effectsa. secondary effect-indirect impact of an event that may not be immed. Observable9.value of a good is subjective10.the test of a theory is its ability to predictPositive vs. normative economicsPositive-study of what is testableNormative-judgments about what people think (not testable)Pitfalls to avoid 1. violation of other things constant principle2. good intentions don’t always equal desirable outcomes3. assoc. is not causation4. fallacy of consumptionMACRO-human behavior on a large
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