Chapter 1 Flashcards
1st Principle of Economy
People face of trade off
2nd Principle of Economy
The Cost of Something Is What you Give Up to Get it
3rd Principle of Economy
Rational People Think at the Margin
4th Principle of Economy
People Respond to Incentives
5th Principle of Economy
Trade Can Make Everyone Better Off
6th Principle of Economy
Markets Are Usually a Good Way to Organize Economic Activity
7th Principle of Economy
Governments Can Sometimes Improve Market Outcomes
People face of trade off
To get something that we like, we usually have to give up something else that we also like.
Making decision requires trading off one goal against another.
The Cost of Something Is What You Give Up to Get It
Opportunity Cost.
Sometimes, the cost of an action is not as obvious as it might first appear.
Rational People Think at the Margin
Economists normally assume that people are rational.
Rational People make decisions by comparing Marginal Benefits or Marginal Costs.
People Respond to Incentives
Rational people respond to incentive
Ex: At higher price
An incentive for buyers to purchase less.
An incentive for sellers to produce more.
Trade Can Make Everyone Better Off
By trading with others, people can buy a greater variety of goods and services at lower cost.
Markets Are Usually a Good Way to Organize Economic Activity
○ Firms decide whom to hire and what to make.
Households decide which firms to work for and what to buy with their incomes.
Governments Can Sometimes Improve Market Outcomes
Invisible hand only work if government enforces the rules and maintains the institutions.
Scarcity
The limited nature of society’s resources
Economics
The study of how society manages its scarce resources
Efficiency
The property of society getting the most it can from its scarce resources
Equality
The Property of distributing economic prosperity uniformly among the members of society
Opportunity Cost
Whatever must be given up to obtain some items
Rational People
People who systemativally and purposefully do the best they can to achieve their objectives
Marginal Change
A small incremental adjustment to a plan of action
Marginal Cost
The additional cost to produce each additional unit
Marginal Benefit
A maximum amount a costumer is willing to pay for an additional goof or services.
Incentives
Something that induces a person to act.
Market Economy
An economy that allocates resources through the decentralized decisiions of many firms and house holds as the interact in markets for goods and services.
Property Rights
The ability of an individual to own and exercise control over scarce resources
8th Principle of Economy
A Country’s Stantard of Living Depends on Its Ability to Produce Goods and Services
9th Principle of Economy
Price Rise When the Government Prints Too Much Money
10th Princuple of Economy
Society Faces a Short-Run Trade-Off between Infaltion and Unemployement
Market Failure
A situation in which a market left on its own fails to allocate resourcesefficiency
Externity
The impact of one person’s actions on the well-being of a bystander
Market Power
The ability of a single economic action (or small group of actors) to have a substanctial influence on market prices
Productivity
The quantity of goods and services produced from each unit of labor input
Inflation
An increase in the overall level of prices in the economy
Business Cycle
Fluctuations in economic activity, such as employment and production
A Country’s Stantard of Living Depends on Its Ability to Produce Goods and Services
Countries’ productivity creates different living standard among them
The growth rate of a nation’s productivity determines the growth rate of its average income
Price Rise When the Government Prints Too Much Money
Inflation can occur.
High inflation imposes various costs on society.
Society Faces a Short-Run Trade-Off between Infaltion and Unemployement
Increase the amount of money can raises prices in the long run
But it becomes complex when it comes to short-run
Stimulates the overall level of spending and thus the demand for goods and services
Higher demands cause firms to raise their prices, but it also encourages them to hire more workers and produce more
More hiring means lower unemployment
