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Economics
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the study of how agents choose to allocate scarce resources and how those choices affect society.
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Scarcity
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the situation of having unlimited wants in a world of limited resources.
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Economic Agent
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an individual or a group that makes choices
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Microeconomics
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the study of how individuals make choices and how those choices affect prices, the allocation of resources, and the well- being of other agents.
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Macroeconomics
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the study of the economy as a whole.
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Positive Economics
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analysis that generates objective descriptions or predictions about the world that can be verified with data
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Normative Economics
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analysis that prescribes what an individual or society ought to do.
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Three Principles of Economics
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Optimization, Equilibrium, Empiricism
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Optimization
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making the best choice possible with given information
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Equilibrium
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when everyone is optimizing; no one would be better off with a different choice
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Empiricism
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using data to figure out answers to interesting questions
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Opportunity Cost
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the best alternative use of a resource.
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Trade-off
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Benefits that must be given up in order to gain others.
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Budget Constraint
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The set of things that a person can choose to do (or buy) without breaking his/her budget
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Cost-benefit Analysis
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a calculation that adds up costs and benefits using a common unit of measurement, like dollars.
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Free Rider Problem
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Exists when an individual or group is able to enjoy the benefits of a situation without incurring the costs
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Scientific Method
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The name for the ongoing process that economists and other scientists use to (1) develop models of the world and (2) test those models with data
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Model
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a simplified description, or representation, of the world
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Empirical Evidence
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a set of facts established by observation and measurement.
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Mean (Average)
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the sum of all the different values divided by the number of values.
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Variable
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a factor that is likely to change or vary.
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Causation
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occurs when one thing directly affects another through a cause-and-effect relationship.
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Correlation
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means that there is a mutual relationship between two things.
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Positive Correlation
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implies that two variables tend to move in the same direction.
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Negative Correlation
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implies that two variables tend to move in opposite directions.
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Zero Correlation
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When the variables have movements that are not related
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Omitted Variable
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something that has been left out of a study that, if included, would explain why two variables that are in the study are correlated.
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Reverse Causality
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occurs when we mix up the direction of cause and effect.
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Experiment
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a controlled method of investigating causal relationships among variables.
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Randomization
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the assignment of subjects by chance, rather than by choice, to a treatment group or control group
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Natural Experiment
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an empirical study in which some process—out of the control of the experimenter—has assigned subjects to control and treatment groups in a random or nearly random way.
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Properties of a Good Economic Question
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(1) Relevant and Important (2) Can be answered
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Market
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a group of economic agents who are trading a good or service, and the rules and arrangements for trading.
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Market Price
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If all sellers and all buyers face the same price
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Perfectly Competitive Market
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(1) sellers all sell an identical good or service, and (2) any individual buyer or any individual seller isn't powerful enough on his or her own to affect the market price of that good or service.
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Price-Taker
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a buyer or seller who accepts the market price—buyers can't bargain for a lower price and sellers can't bargain for a higher price
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Law of Demand
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In almost all cases, the quantity demanded rises when the price falls (holding all else equal).
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Quantity Demanded
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the amount of a good that buyers are willing to purchase at a given price.
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Demand Curve
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plots the quantity demanded at different prices. A demand curve plots the demand schedule.
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Willingness to Pay
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the highest price that a buyer is willing to pay for an extra unit of a good.
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Diminishing Marginal Benefit
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As you consume more of a good, your willingness to pay for an additional unit declines.
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Movements along the Demand Curve
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Changes in the price itself
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Shifts along the Demand Curve
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(1) Tastes and Preferences (2) Income and Wealth (3) Availability and prices of related goods (4) Number and Scale of Buyers (5) Buyers' expectations
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Law of Supply
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In almost all cases, the quantity supplied rises when the price rises (holding all else equal)
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Quantity Supplied
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the amount of a good or service that sellers are willing to sell at a given price.
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Supply Curve
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plots the quantity supplied at different prices. A supply curve plots the supply schedule.
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Willingness to Accept
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the lowest price that a seller is willing to get paid to sell an extra unit of a good. Willingness to accept is the same as the marginal cost of production.
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Movements along the Supply Curve
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A change in the price of the good itself
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Shifts along the Supply Curve
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(1) Prices of inputs used to produce the good (2) Technology used to produce the good (3) Number and scale of sellers (4) Sellers' beliefs about the future
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Competitive Equilibrium
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the crossing point of the supply curve and the demand curve.
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Competitive Equilibrium Price
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equates quantity supplied and quantity demanded
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Competitive Equilibrium Quantity
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the quantity that corresponds to the competitive equilibrium price.
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Excess Supply (Surplus)
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When the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded
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Excess Demand (Shortage)
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When the market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied
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