Ch. 1: Introduction to Economics (Microeconomics)

Economics
the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided
Opportunity cost
the best alternative that we forgo, or give up, when we make a choice or a decision
Scarce
limited
Marginalism
the process of analyzing the additional or incremental costs or benefits arising from a choice or decision
Sunk costs
costs that cannot be avoided because they have already been incurred
Efficient market
a market in which profit opportunities are eliminated almost instantaneously
Microeconomics
the branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units==that is, firms and households
Positive economics
an approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
Normative economics
an approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action; also called policy economics
Descriptive economics
the compilation of data that describe phenomena and facts
Economic theory
a statement or set of related statements about cause and effect, action and reaction
Model
a formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables
Variable
a measure that can change from time to time or from observation to observation
Ockham’s razor
the principle that irrelevant detail should be cut away
Ceteris paribus
a device used to analyze the relationship between two variables while the values of other variables are held unchanged
Post hoc, ergo propter hoc
literally “after this (in time), therefore because of this.” A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.
Fallacy of composition
the erroneous belief that what is true for a part is necessarily true for the whole
Empirical economics
the collection and use of data to test economic theories
Efficiency
in economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost
Equity
fairness
Economic growth
an increase in the total output of an economy
Stability
a condition in which national output is growing steadily, with low inflation and full employment of resources
Positive relationship (graph)
when the line slopes upward
Negative relationship (graph)
when the line on the graph slopes downward (welfare payments are lower at higher income levels)