Three Principles: Key Terms

Economics Economics is the study of choices and how those choices affect others. Formally, economics is the study of how agents choose to allocate scarce resources and how those choices affect society.

Empiricism is analysis that uses data-evidence-based analysis. Economists use data to develop theories, to test theories, to evaluate the success of different government policies, and to determine what is causing things to happen in the world.

Equilibrium is the special situation in which everyone is simultaneously optimizing, so nobody believes they would benefit personally by changing his or her own behavior, given the choices of others.

Holding all else equal “Holding all else equal” implies that everything else in the economy is held constant. The latin phrase ceteris paribus means “with other things the same” and is sometimes used in economic writing to mean the same thing as “holding all else equal.”

Marginal Analysis Marginal Analysis is a cost-benefit calculation that studies the difference between a feasible alternative and the next feasible alternative.

Model A model is a simplified description, or representation of the world. Sometimes, economists will refer to a model as a theory. These terms are often used interchangeably.

Normative Economics Normative Economics is an analysis that generates objective descriptions or predictions, which can be verified with data. should do.

Positive Economics Positive Economics is an analysis that recommends what an individual or society should do.

Principle of optimization at the margin The principle of optimization at the margin states that an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off.

Opportunity Cost Opportunity cost is the best alternative use of a resource.

Optimization means trying to pick the best feasible option, given whatever limited information, knowledge, experience, and training the economic agent has.

Variable A variable is a factor that is likely to change or vary.