Final Review - Test 1 Review Ch. 1 Economics the study of...

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Test 1 Review Ch. 1 Economics – the study of how people use their scarce resources to satisfy their unlimited wants Resources – the inputs, or factors of production, used to produce the goods and services that people want; resources consist of labor, capital, natural resources, and entrepreneurial ability Labor – the physical and mental effort used to produce goods and services Capital – the buildings, equipment, and human skills used to produce goods and services Natural resources (land) – all gifts of nature used to produce goods and services; includes renewable and exhaustible resources Entrepreneurial ability – a profit-seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation Rent – payment to resource owners for the use of their natural resources Profit – reward for entrepreneurial ability; sales revenue minus resources cost Scarcity – occurs when the amount people desire exceeds the amount available at a zero price Market – a set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms Circular-flow model – a diagram that traces the flow of resources, products, income, and revenue among economic decision makers Rational self-interest – individuals try to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit Marginal – incremental, additional, or extra; used to describe a change in an economic variable Economic theory (economic model) – a simplification of reality used to make predictions about cause and effect in the real world Variable – a measure, such as price or quantity that can take on different values at different times Behavioral assumption – an assumption that describes the expected behavior of economic decision- makers, what motivates them Hypothesis – a theory about how key variables relate Positive economic statement – a statement that can be proved and disproved by reference to facts; “what is” Normative economic statement – a statement that reflects an opinion, “what should be” Association-is-causation fallacy – the incorrect idea that if two variables are associated in time, one must necessarily cause the other Fallacy of composition – the incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole (e.g. good for you to steal Internet, but what if everyone did it?) Ignoring secondary effects – not anticipating unintended consequences of your decision/action (e.g. child-proof bottles lead to more children getting to drugs because adults left the tops off since they were hard to get open)
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Ch. 2 Opportunity cost – the value of the best alternative forgone when an item or activity is chosen Sunk cost – a cost that has already been incurred cannot be recovered, and thus is irrelevant for present and future economic decisions (used in marginalism)
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This note was uploaded on 05/21/2010 for the course ACIS 2116 taught by Professor Cmeasterwood during the Spring '08 term at Virginia Tech.

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Final Review - Test 1 Review Ch. 1 Economics the study of...

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