Chapter 1 Flashcards
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants.
Economics
The study of the choices entities make to attain their goals, given their scarce resources.
What do economists do?
Economists study these choices using economic models, simplified versions of reality used to analyze real-world economic situations.
Market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
What do we assume when analyzing markets
People are rational
People respond to economic incentives
Optimal decisions are made at the margin.
Marginal analysis
Analysis that involves comparing marginal benefits and marginal costs
Trade-off
The idea that, because of scarcity, producing more of one good or service means producing less of another good or service
Opportunity cost
The highest-valued alternative that must be given up in order to engage in some activity.
Centrally planned economy
An economy in which the government decides how economic resources will be allocated.
Market economy
An economy in which the decisions of households and firms interacting in market allocate economic resources
Mixed economy
An economy in which most economic decisions result from the interaction of buyers and sellers
Productive efficiency
A situation in which a good or service produced at the lowest possible cost
Allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
Voluntary exchange
A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.
Equity
Fair distribution of economic benefits.
