What is economics?
The study of how people make social choices under scarcity to maximize satisfaction.
What is the economic perspective?
A viewpoint that focuses on:
Scarcity and choice
Rational behavior
Marginal analysis
What is scarcity?
We have limited goods and services.
We have limited time.
We can’t have everything we want.
What is opportunity cost?
The value of the next best alternative you give up when making a choice.
What is rational behavior (purposeful behavior)?
The assumption that people act in their “rational self-interest.”
People can still make mistakes or be emotional.
They try to maximize their satisfaction.
What is utility?
The satisfaction or happiness from consuming a good or service.
What are the two concepts of utility?
Cardinal utility: Utility can be measured in numbers.
Ordinal utility: Utility can only be compared (e.g., I prefer this over that).
What do consumers and producers want to maximize?
Consumers: Want the greatest possible utility (U) within their budget.
Producers: Want maximum profit within their cost limits.
What is marginal analysis?
Comparing marginal costs and marginal benefits.
Deciding if the extra benefit is worth the extra cost (the opportunity cost).
What is the scientific method?
The process used to find cause and effect.
What is an economic principle?
A statement or model about economic behaviour or the economy.
What are the key features of economic principles?
Generalizations: They describe tendencies of “typical” people or firms.
Other-things-equal assumption (ceteris paribus): We assume everything else stays the same so we can focus on one thing.
Graphical expression: They are often shown in graphs.
What is the other-things-equal assumption (ceteris paribus)?
The assumption that all other variables are held constant.
What is macroeconomics?
Looks at the economy as a whole.
Deals with aggregates (total amounts), like total output or total employment.
What is microeconomics?
Looks at individual parts of the economy.
Deals with specific decision-makers, like a single consumer, worker, or business.
What is positive economics?
Focuses on facts and cause-and-effect.
It is objective and describes “what is.”
It can be tested as true or false.
What is normative economics?
Incorporates value judgments and opinions.
It is subjective and describes “what ought to be.”
It cannot be tested.
