1. Chapter 1 Flashcards
Where does he word economy come from?
What is economics?
Greek word for “one who manages a household”
Households and economies have much in common
Economics is the study of how society manages its scarce resources
What is scarcity?
The limited nature of society’s resources
Society cannot produce all the goods and services people wish to have
What are the four principles of decision making?
- People face tradeoffs- making decisions requires trading off one goal with another (fun time for studying)
- The cost of something is what you give up to get it
- Rational people think at the margin
- People respond to incentive
What does efficiency and equity mean?
Efficiency- the property of society getting the most it can from its scarce resources
Equity- the property of distributing economic prosperity fairly among the members of society
Efficiency refers to the size of the pie and equity refers to how it’s divided
What is opportunity cost?
The opportunity cost of an item is what you give up to get that item
Whatever must be given up to obtain some item
What are rational people?
Those who systematically and purposefully do the best they can to achieve their objectives, given the opportunities they have
What are marginal changes?
Small incremental adjustments to a plan of action
What are the 3 principles that concern how people interact with eachother?
- Trade can make everyone better off
- Markets are usually a good way to organize economic activity
- Governments can sometimes improve market outcome
What is a market economy?
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
The people decide.
What guides households and firms to desirable market outcomes?
The invisible hand
What are property rights?
How does this help the indivisible hand?
The ability of an individual to own and exercise control over scarce resources
This helps the invisible hand guide us to desirable market since households and firms don’t have to be scared of losing what’s theirs
What is market failure and market power?
Failure- a situation in which a market left on its own fails to allocate resources efficiently
Power- the ability of a single economic actor (or group of) to have a substantial influence on market prices
This can cause market failure
What is externality and an example?
The impact of one persons actions on the well-being of a bystander
Example is pollution, when a production of a good polluted the air and creates health problems for those who live nearby, the market left on its own devices may fail to take this cost into account
What are the three principles concerning the economy as a whole?
- A country’s standard of living depends on its ability to produce goods and services
- Prices rise when the government prints too much money
- Society faces a short-run tradeoff between inflation and unemployment
What is productivity?
The quantity of goods and services produced from each out of workers time
Countries productivity is the result in variations of living standards
