10 Principles Flashcards
How people make decisions.
- Trade offs.
- Cost of something.
- Rational people think at the margin.
- People respond to incentives.
- People face trade offs.
I have to give someone something in order to get what I want.
Efficiency.
How people make the most of their scarce resources.
Equity.
The property of distributing economic prosperity fairly among the members of society. (Cut the economic pie in equal pieces for everyone).
Opportunity cost.
What you give up to get something: money, time, etc.
Is the benefit good enough?
- Rational people think at the margin.
Use marginal changes to make minimal adjustments to a plan of action. Compare marginal benefit to marginal cost. Rational decision makers take action if and only if the marginal benefit is larger than the marginal cost.
- People respond to incentives.
Incentives have different outcomes, altering the way an individual behaves and consequentially invests.
How people interact.
- Trade makes everyone better.
- Markets are a good way to organize the economy.
- Governments can sometimes improve market economies.
- Trade can make everyone better.
Trade allows everyone to specialize in what they do best.
- Markets are a good way to organize the economy.
Firms and households interact in the marketplace. Self interest gets the market economy going since everyone is working for themselves and this benefits others. When the government alters the prices, the market economy suffers.
- Governments can sometimes improve market economies.
If the governments keep in rule and maintain the institutions who are key to the market then the economy doesn’t suffer. For this, property rights are fundamental.
Property rights.
The ability of an individual to own and control scarce resources.
Market failure.
A situation in which a market on its own fails to allocate resources efficiently.
Externality.
(A cause of market failure.) The impact of one person’s actions on the wellbeing of a bystander.
Market power.
(A cause of market failure. AKA cartels) the ability of a single economic actor, or a small group of actors, to unduly influence market prices.
How the economy as a whole works.
- Country’s Standard of living depends on its ability to produce.
- Prices rise when the government prints too much money.
- Short-run trade-off between inflation and unemployment.
- How a country’s SOL depends on its ability to produce.
In nations where workers who produce large quantities of goods and services most people will have a high standard of living (SOL), opposite to nations where workers are less productive, whose citizens will have a lower SOL.
- Prices rise when the government prints too much money.
Inflation is mostly caused by the growth in the quantity of one nation’s money. Too much money = money value falls.
- Short-run trade-off between inflation and unemployment.
Inflation and unemployment go in opposite directions.
Inflation = higher prices - higher demand - more jobs.
This constitutes the business cycle
- The cost of something is what you give up to get it.
Compare costs of alternatives. Some costs can include more stuff than it seems.
