Key Elements of Economics

scarcity

the concept that there is not enough of a good freely available from nature so that people can have as much as they would like

types of resources

1. human resources
2. physical resources
3. natural resources

Incentives matter

People respond to changing incentives in a predictable way

are the same things rational for everyone

no

utility

The subjective benefit or satisfaction a person expects from a choice or course of action

why is there no such thing as a free lunch

because resources are scarce, tradeoffs must be made

opportunity cost

The highest valued alternative that must be sacrificed when choosing an option.

decisions are made at the

margin

law of diminishing marginal utility

As the quantity of a good consumed increases the extra satisfaction gained decreases

cost-benefit analysis

economic model that compares the marginal costs and marginal benefits of a decision

economic efficiency

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

do people want to be fully informed to make a rational decision

no

voluntary trade promotes

economic progress

trade creates value by

putting goods into the hands of those who want them the most

Voluntary trade makes it possible to produce things at a lower cost through

mass production techniques

transaction costs

time, effort and other resources needed to search out and complete an exchange

middleman

reduces transaction cost

transaction costs are

an obstacle to trade

what brings the choices of buyers and seller into balance

prices

Profits direct businesses

toward activities that increase wealth

People Earn Income by

helping others

do entrepreneurs expand the pie or take a slice of it

expand

Production, not just ___, provides the source of high living standards

jobs

economic progress comes through

1. trade
2. investment
3. better ways of doing things
4. economic growth

what part of investments are costly

current consumption

improvements in technology and economic organization

spurs economic progress

creative destruction

replacing old products and production methods by innovative new ones that consumers judge to be superior

examples of economic organization

private property rights, competition, personal and economic freedom

the invisible hand

the tendency for people while pursuing their own interests to promote the economic well-being of society

Secondary effect

the indirect impact of an event or policy that may not be easily and immediately observable

pitfalls to avoid in economic thinking

1. Violation of the ceteris paribus principle
2.The belief that good intentions equal desirable outcomes
3. The fallacy of composition
4. The belief that association is causation

The Nirvana Fallacy

The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative