Business 115

Question

What is economics?

Answer

Study of the allocation of scarce resources to fulfill society’s wants and the implications of that allocation.

Question

How does economics relate to decision making?

Answer

Economics enhances the art of making good decisions.

Question

What do economic models allow us to do?

Answer

Simplify, explore, and learn by isolating various factors of decisions and their outcomes.

Question

What is inductive reasoning?

Answer

Building models based on observations.

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What is deductive reasoning?

Answer

Explaining observations with our models.

Question

What is positive analysis?

Answer

Seeking to understand how things are (fact).

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What is normative analysis?

Answer

Recommending how things should be (opinion).

Question

What does it mean to allocate resources?

Answer

To budget, plan, or set aside resources.

Question

How are resources allocated?

Answer

Through authority, price (markets), schedule (values/goals), or vote.

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What is microeconomics?

Answer

Study of resource allocation based on individual and firm decision making.

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What is macroeconomics?

Answer

Study of resource allocation at a national and system level.

Question

What is opportunity cost?

Answer

The value of the next best option given up.

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What drives decision making?

Answer

Scarcity; we give something up every time we make a decision.

Question

What are explicit costs?

Answer

Numerical cost of a decision (e.g., $20).

Question

What are implicit costs?

Answer

Opportunity costs not captured by spending money; potential value missed out on.

Question

What is an example of explicit and implicit costs?

Answer

Option A: Movies ($20 explicit), Option B: Work ($95 implicit).

Question

What are incentives?

Answer

Motivations that drive behavior and influence decision making.

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What are intrinsic incentives?

Answer

Personal fulfillment and satisfaction from doing certain things.

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What are extrinsic incentives?

Answer

Material rewards or punishments for accomplishing or failing tasks.

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What is optimization in decision making?

Answer

Weighing known pros and cons to pick the best feasible options.

Question

What is marginal utility?

Answer

The benefit created by consuming one more unit of something.

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What is marginal cost?

Answer

Cost of consuming one more unit of something.

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What is marginal equilibrium?

Answer

Pursuing options that maximize net utility.

Question

What is maximum utility?

Answer

Where Marginal Cost equals Marginal Benefit (MC=MB).

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What does efficiency imply?

Answer

Minimizing cost to achieve the utility obtained.

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What does fairness imply in economics?

Answer

Something about the distribution of utility.

Question

What is the sunk cost fallacy?

Answer

Making decisions based on past costs rather than future costs.

Question

What should not affect current decisions?

Answer

Any cost that has already been paid and cannot be recovered.