Economics - thinking like an economist

• Economics


  The social science that studies the choices that individuals, businesses, governments and entire societies make as they cope with scarcity, the incentives that influence those choices and the arrangements that coordinate them
• Microeconomics


  • The study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments
• Macroeconomics


  • The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses and governments make
• Scarcity


  The condition that arises because wants exceeds the ability of resources to satisfy them
• Goods and services


  The objects (goods) and actions (services) that people value and produce to satisfy human wants
• All economic questions and problems arise because human wants exceed the resources available to satisfy them
• Faced with scarcity, we must make choices—we must choose among the available alternatives
• The choices we make depend on the incentives we face
• Self-interest


  Choices that are best for the individual who makes them
• Social interest


  Choices that are best for society as a whole
• Globalisation


  Can be in the interest of the owners of multinational firms that profit, but may not be in the social interest
• The "Information Age"


  Makers of computer chips and programs developed products in their self-interest, but may not have developed them in the social interest
• Climate change


  The choices we make concerning how to produce and use energy are made in our self-interest, but may not serve the social interest
• Government budget deficit and debt

  The choices we make as voters may serve our self-interest but may not serve the social interest
• Choice is a tradeoff


  Selecting from alternatives, giving up one thing to get something else
• Opportunity cost


  The best thing that you must give up to get something—the highest-valued alternative forgone
• Benefit


  The gain or pleasure that something brings, measured by what you are willing to give up
• Rational choice


  A choice that uses the available resources to best achieve the objective of the person making the choice
• Marginal cost


  The opportunity cost of a one-unit increase in an activity
• Marginal benefit


  What you gain when you get one more unit of something, measured by what you are willing to give up to get one additional unit of it
• You make a rational choice when you take those actions for which marginal benefit exceeds or equals marginal cost
• Incentive


  A reward or a penalty—a "carrot" or a "stick"—that encourages or discourages an action
• The scientific method


  • A common sense way of systematically checking what works and what doesn't work
• Economic model


  A description of some feature of the economic world that includes only those features assumed necessary to explain the observed facts
• Natural experiment


  A situation that arises in the ordinary course of economic life in which the one factor of interest is different and other things are equal
• Correlation


  The tendency for the values of two variables to move together in a predictable and related way
• Economic experiment


  Putting people in a decision-making situation and varying the influence of one factor at a time to discover how they respond
• Normative statement


  A statement about what ought to be
• Positive statement


  A statement about what is
• Economics provides a way of approaching problems in all aspects of our lives: personal, business, government
• Graph


  A visual representation of the relationship between two variables
• Graph


  • Horizontal line is the x-axis
  • Vertical line is the y-axis
  • Common zero point is the origin

  
• Scatter diagram


  Graph of the value of one variable against the value of another variable
• Time-series graph


  Graph that measures time on the x-axis and the variable or variables in which we are interested on the y-axis
• Trend


  General tendency for the value of a variable to rise or fall
• Cross-section graph


  Graph that shows the values of an economic variable for different groups in a population at a point in time
• Positive (direct) relationship


  Relationship between two variables that move in the same direction
• Linear relationship


  Relationship that graphs as a straight line
• Positive (direct) relationships


  • Distance travelled vs speed
  • Recovery time vs sprint distance
  • Problems worked vs study time
• Negative (inverse) relationship


  Relationship between two variables that move in opposite directions