Economist Core Assumptions

1) People are rational 2) People respond to Economic Incentives 3) Optimal decisions are made at the Margins

1) People are rational

- Assumption that consumers and firms use all available information to achieve their goals -Rational ppl weigh the benefits of an action vs its expected cost - What am I gaining vs What am I paying

2) People respond to Economic Incentives

If the cost increases, people get it less if the benefits increase people will do more ex: if the government raises the tax on gas, consumers buy more electric cars or use public transit

3) Marginal Decisions/ The Decision Rule

- Marginal= additional - Marginal Benefit (MB) = Marginal Cost (MC)

The additional benefit received from consuming one more unit

The additional cost incurred from producing or consuming one more unit

Economic Problems Every Society Must Solve

1)What goods and services will be produced 2)How will goods and services be produced 3)Who will receive the goods & services produced

Centrally Planned Economy

The Government decides how economic resources will be allocated

Resources are allocated based on the decisions that households and firms make

Decisions happens in the markets but the Government plays a prominent role Centrally planned + Market Economy = Mixed Economy

- The study pf how households and firms decide and interact in markets - Focuses on the market economy

- The study of the economy as a whole - Ex: Inflation, unemployment, and growth

Economists formulate (blank) and test it through (blank)

- Hypothesis and economic data Economists formulate hypothesis and test it through economic data.

- objective facts that can be tested - Analyzes through the lens of "What Is" ex: An increase in minimum wage causes enemployment

- Subjective opinions/judgments - Analyzes through the lens of "What Should Be" Ex: The government should raise the minimum wage

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Econ Week #1

Economic Ideas, Problems, Systems, Models, & Analysis

Term	Definition
The world is governed by	scarcity
Define scarcity:	Limited resources and unlimited human want; supply doesn't match demand
Result of scarcity	Every choice involves a trade-off
Economist Core Assumptions	1) People are rational 2) People respond to Economic Incentives 3) Optimal decisions are made at the Margins
1) People are rational	- Assumption that consumers and firms use all available information to achieve their goals -Rational ppl weigh the benefits of an action vs its expected cost - What am I gaining vs What am I paying
2) People respond to Economic Incentives	If the cost increases, people get it less if the benefits increase people will do more ex: if the government raises the tax on gas, consumers buy more electric cars or use public transit
3) Marginal Decisions/ The Decision Rule	- Marginal= additional - Marginal Benefit (MB) = Marginal Cost (MC)
Marginal Benefit	The additional benefit received from consuming one more unit
Marginal Cost	The additional cost incurred from producing or consuming one more unit
Economic Problems Every Society Must Solve	1)What goods and services will be produced 2)How will goods and services be produced 3)Who will receive the goods & services produced
Centrally Planned Economy	The Government decides how economic resources will be allocated
Market Economy	Resources are allocated based on the decisions that households and firms make
Mixed Economy	Decisions happens in the markets but the Government plays a prominent role Centrally planned + Market Economy = Mixed Economy
Microeconomics	- The study pf how households and firms decide and interact in markets - Focuses on the market economy
Macroeconomics	- The study of the economy as a whole - Ex: Inflation, unemployment, and growth
What phrase are economic models constructed around?	Ceteris Paribus
Ceteris Paribus	All else constant
Economists formulate (blank) and test it through (blank)	- Hypothesis and economic data Economists formulate hypothesis and test it through economic data.
Positive Analysis	- objective facts that can be tested - Analyzes through the lens of "What Is" ex: An increase in minimum wage causes enemployment
Normative Analysis	- Subjective opinions/judgments - Analyzes through the lens of "What Should Be" Ex: The government should raise the minimum wage

Created by: seyseyHU

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