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Economists tend to break down problems by asking a set of four questions:
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1) What are the wants and constraints of those involved?
2) What are the trade-offs?
3) How will others respond?
4) Why isn't everyone already doing it?
2) What are the trade-offs?
3) How will others respond?
4) Why isn't everyone already doing it?
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What term refers to the condition of wanting more than you can get with available resources?
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Scarcity
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Give an example for wants and constraints:
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Bangladesh villagers and bankers:
The bankers want to make a profit by giving out loans to people but they are constrained by how much money they have, so they only give it out to people that they know will pay them back..
The villagers wants to work on their business ideas but they are constrained due to the fact that they are too poor to be believed by the banks that they are pay-back worthy.
The bankers want to make a profit by giving out loans to people but they are constrained by how much money they have, so they only give it out to people that they know will pay them back..
The villagers wants to work on their business ideas but they are constrained due to the fact that they are too poor to be believed by the banks that they are pay-back worthy.
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What word does wants and constraints derive from?
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Scarcity
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The true cost of something is not just the amount you have to pay for it, but also:
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The opportunity you lose to do something else instead
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What is another phrase that is synonymous with trade-offs?
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Opportunity cost
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The value of your next best alternative is called the:
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Opportunity cost
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If you were at a place that only served spaghetti and pizza, and your willing to pay 10$ for spaghetti but 15$ for pizza.. even though both are priced at 15$ on the menu, what is the opportunity cost when you choose pizza? How about when you choose spaghetti?
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The opportunity cost = the value of the next best alternative
If you bought pizza which is 15, you would have been willing to spend 10 on spaghetti, so the opportunity cost is 10.
If you bought spaghetti which is 15, you would have been willing to spend 15 on pizza, so the opportunity cost is 15.
If you bought pizza which is 15, you would have been willing to spend 10 on spaghetti, so the opportunity cost is 10.
If you bought spaghetti which is 15, you would have been willing to spend 15 on pizza, so the opportunity cost is 15.
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When you're rationally choosing a decision, do you pick the alternative with a higher opportunity cost or with a lower opportunity cost?
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A lower opportunity cost.. You want the pizza so you buy it and deal with the 10$ spaghetti OC rather than buying spaghetti and dealing with the 15$ pizza OC
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When you choose the alternative with the lower opportunity cost, that means that:
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You picked the alternative that benefits you the most.
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What does it mean that people make decisions at the margin?
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People compare the additional benefit of a choice against the additional costs, without considering related benefits and costs of past choices
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If you paid 20$ to get into an amusement park and the price for each ride is 2$, what is the marginal cost?
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2$
You do not take the 20$ into consideration because you have already paid it, now you are just basing it on the marginal decision making
You do not take the 20$ into consideration because you have already paid it, now you are just basing it on the marginal decision making
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Does marginal decision making take past actions into account?
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No, they are based on 1 extra or 1 less, no sunk costs.
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What is a word that describes "How will others respond"?
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Incentives
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What is a term that refers to something that causes people to behave in a certain way by changing the tradeoffs they face?
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Incentives.
If you increase the price on someone's favorite food, they might not buy it anymore
If you increase the price on someone's favorite food, they might not buy it anymore
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What does a positive incentive do?
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Make someone more likely to do something
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What does a negative incentive do?
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Make someone less likely to do something
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Why does asking how will others respond help you in the long run?
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It helps because any action that you do will effect those around you, and asking what that effect will cause can determine if your action is beneficial or negative for you in the long-run.
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What is the term that describes the words "Why isn't everyone already doing it"?:
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Efficiency
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Under normal circumstances, individuals and firms will act to provide the things that:
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people want
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What term describes a situation in which resources are used in the most productive way possible to produce goods and services that have the greatest total economic value to society?
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Efficiency
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Increasing _____ means finding a way to better use resources to produce the things that people want:
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Efficiency
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What is a term used to refer to a consistently observed relationship between two events or variables?
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Correlation
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What is a term used to describe a relationship between two events in which one brings about the other?
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Causation
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Are correlation and causation the same thing?
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Not at all, causation is when something causes something else.. Correlation is when something is effected when something else is but not for any particular reason.
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What is the circular flow model a representation of?
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How the economy's transactions work together
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What are the three factors of production?
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Land, labor and capital
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How are households depicted in the circular flow model?
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They supply land and labor to firms and invest capital in firms. They also buy goods and services that firms produce.
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How are firms depicted in the circular flow model?
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They buy or rent the land, labor, and capital supplied by households, and they produce and sell goods and services.
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Does the circular flow model show households as being tightly connected to both production and consumption?
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Yes
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There are two different markets being depicted in the circular flow model, what are they?
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1) The market for goods and services: All of the activities involved in the buying and selling of goods and services. Households spend their wages from labor and their income from and and capital and firms earn revenue from selling their goods and services
2) The market for the factors of production. Households supply land, labor, and capital, and firms hire and purchase or rent these inputs
2) The market for the factors of production. Households supply land, labor, and capital, and firms hire and purchase or rent these inputs
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What is the template for the circular flow model?
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Household spending and firms receiving revenue from household...
Firms paying wages, rent and profit and households receiving income
Firms paying wages, rent and profit and households receiving income
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A good model has these three characteristics:
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1) Predicts cause and effect
2) Makes clear assumptions
3) Describes the real world accurately
2) Makes clear assumptions
3) Describes the real world accurately
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Models should predict cause and effect, meaning that:
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If you say A causes B, you should explain why A causes B
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Models should make clear assumptions, so that:
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People know when the model will accurately predict the situation, and when a situation falls outside of what the model is accounting for
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Models should describe the real world accurately because:
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If it doesn't then it's not useful!
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What is a normative statement?
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A statement that makes a claim about how the world should be
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What is a positive statement?
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A statement that makes a factual claim about how the world actually works
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Is this statement normative or positive?
Income taxes reduce the number of hours that people want to work.
Income taxes reduce the number of hours that people want to work.
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Positive. It is how the world actual works (it's a fact).
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Is this statement normative or positive?
Income taxes should be reduced or abolished.
Income taxes should be reduced or abolished.
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Normative, it's based on what someone claims that world should be
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