What are the 3 key economic ideas?
- People are rational.
- People respond to economic incentives.
- Optimal decisions are made at the margins.
What are the three economic questions?
- What to produce?
- How to produce it?
- Who gets it?
What is marginal analysis?
Comparing marginal benefit to marginal cost.
What is the opportunity cost of a given decision?
This is equal to the value of the highest value alternative that must be given up to engage in the activity.
What are the two types of efficiency?
- Productive efficiency
- Allocative efficiency
What is productive efficiency?
Productive efficiency occurs when a good or service is produced at the lowest possible cost.
What is allocative efficiency?
Allocative efficiency occurs when production is in accordance with consumer preferences.
What must be true about a hypothesis in order for it to be valid?
A hypothesis must be theoretically possible to disprove in order to be valid.
What are the two types of analysis?
Positive and Normative analysis
What is positive analysis concerned with?
Positive analysis is concerned with what is.
What is normative analysis concerned with?
Normative analysis is concerned with what ought to be.
Does economics focus on positive or normative analysis?
Economics focuses on positive analysis.
Why are assumptions important for economic modeling?
Assumptions simplify models, making them more useful.
What are the five steps to model development?
- Decide on assumptions.
- Find a testable hypothesis.
- Test hypothesis with data.
- Revise model if needed.
- Retain the model for future use.
What does Macroeconomics cover?
Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
What does microeconomics cover?
Microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
What kind of movement on a graph does a change in price cause?
A shift along the existing curves.
