Definition of economics
the study of how individuals and societies use limited resources to satisfy unlimited wants.
Fundamental economic problem
individuals and societies must choose among available alternatives.
Economic goods, free goods, and economic bads
economic good (scarce good) - the quantity demanded exceeds the quantity supplied at a zero price.
free good - the quantity supplied exceeds the quantity demanded at a zero price.
economic bad - people are willing to pay to avoid the item
natural resources, the “free gifts of nature” labor
the contribution of human beings capital
plant and equipment this differs from “financial capital” entrepreneurial ability
Economic Resource land labor capital entrepreneurial ability
Resource payment rent wages interest profit
individuals select the choices that make them happiest, given the information available at the time of a decision.
self-interest vs. selfishness
Positive and normative analysis
attempt to describe how the economy functions relies on testable hypotheses normative economics
relies on value judgements to evaluate or recommend alternative policies.
observe a phenomenon, make simplifying assumptions and formulate a hypothesis, generate predictions, and test the hypothesis.
ceteris paribus – holding everything else constant abstraction in economics
used to simplify reality
fallacy of composition
occurs when it is incorrectly assumed that what is true for each and every individual in isolation is true for an entire group.
post hoc, ergo propter hoc fallacy
(association as causation)
occurs when one incorrectly assumes that one event is the cause of another because it precedes the other.
Microeconomics vs. macroeconomics
microeconomics - the study of individual economic agents and individual markets macroeconomics - the study of economic aggregates
Algebra and graphical analysis
A linear relationship possesses a constant slope, defined as:
If an equation can be written in the form: Y=mX+b, then: m = slope, and b = Y - intercept.