(Ch 01) Flashcards
What is the primary focus of economics?
The study of how society manages its scarce resources.
What are the three categories of the ten principles of economics?
- How people make decisions
- How people interact
- How the economy works as a whole
What does the principle ‘People Face Trade-offs’ imply?
To get more of something we like, we have to give up something else.
What is the classic example of a trade-off mentioned in economics?
The trade-off between ‘guns and butter’.
What is the opportunity cost of an item?
What you give up to get that item.
What does the opportunity cost of going to college include?
- Tuition payment
- Value of time that could have been spent working
How do rational people make decisions?
They only proceed with an action if the marginal benefit exceeds the marginal cost.
What is an incentive?
Something that induces a person to act.
True or False: Trade can make everyone better off.
True.
What does a market economy rely on to make decisions about production and consumption?
Interactions between millions of firms and households.
What did Adam Smith describe as guiding economic activity in markets?
An ‘invisible hand’.
What is market failure?
When markets fail to allocate resources efficiently.
What is an externality?
When the actions of one person affect the well-being of a bystander.
What can government intervention improve in the market?
- Efficiency
- Equality
What largely accounts for differences in income and standards of living between countries?
Differences in productivity.
What causes inflation?
Rapid growth in the quantity of money.
What is the short-run trade-off in economics?
Between inflation and unemployment.
Fill in the blank: The principle that states that rational people think at the _______ is important in economics.
Margin
What effect does an increase in the quantity of money have in the short run?
Stimulates spending, raising both prices and production.
What is a positive externality?
A benefit that lands on a bystander.
True or False: Trade is considered a zero-sum game.
False.
What should public policy do to improve standards of living?
- Improve education
- Generate better tools
- Improve access to technology
What happens when the government prints too much money?
Prices rise due to inflation.
