Chapter 1: 10 Principles of Economics Flashcards
When making decisions, people..
face trade offs
What is Equality?
The property of distributing economic prosperity uniformly among the members of society
What is Efficiency?
The property of society getting the most it can from itss carce resources
Effieciency refers to the
Size of the economic pie
What is opportunity cost?
Whatever must be given up to obtain some item, looks at the full cost and value of making choices
Equality refers to
how evenly the pie is sliced
What are rational people?
People who systematically and purposefully do the best they can to acheive their objective
What is marginal change?
An incremental adjustment to a plan of action
A person’s willingness to pay for a good depends on..
the marginal benefit that an extra unit of the good would yield
What can trade do?
Make everyone better off because trade allows people to specialize in what they do best and to enjoy a greater variety of goods and services
What is an example of marginal benefit?
Water is plentiful so the marginal benefit is low, diamonds are rare so the marginal benefit is high
What is 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
What are incentives?
Something that induces a person to act
What are the two ways Market Failure is created? And what is a Market Failure?
Externalities and Market Power
When markets fail to alocate resources efficiently, there has been a market failure
What are some ways the government can help the economy?
Instilling Property Rights and tackling Market Failure
How are Externalities created?
Externalities are created due to the impact of one person’s actions on the well being of a bystander (EX: Pollution)
How does Market Power affect the economy?
Market Power allows a single economic actor to have a substantial influence on market prices, meaning they have control on certain areas. (EX: Monopolies in Oil industry)
What is productivity?
The quantity of goods and services produced from each unit of labor input
What is inflation?
An increase in the overall level of prices in the economy
When politicians make policies the key question is..
How will it affect the economy’s ability to produce goods and services?
What is the biggest cause of inflation?
The growth in the quantity of money.
When the government creates large quantities of the nation’s money, the VALUE of the money FALLS.
Describe the short run effects of money growth
- Increase of money leads to Increase spending/demand for goods and services
- Higher demand leads to Higher prices.
Higher Demand and Higher Prices leads to more workers.
More workers leads to larger quantity of goods and services - Lastly, more hiring equals lower unemployment
The short run of money growth can be described as
Business cycle, fluctuations in economic activity as measured by the production of goods and services or the # of people employed
