Chapter 1 Flashcards
Scarcity
The limited nature of society’s resources.
Economics
The study of how society manages its scarce resources.
3 Aspects of Economic Study
What do economists study?
(1) How people make decisions
(2) How people interact
(3) The forces and trends that affect the entire economy
Principle #1
People face trade-offs.
Obtaining something that we like requires us to give up another thing that we also like.
Principle #2
Opportunity Cost: The cost of an item/resource/goal is what is given up (paid) to obtain it.
Efficiency
The situation in which society receives the most it can from its scarce resources.
Equality
The situation in which economic prosperity is distributed uniformly among the members of society.
Principle #3
Rational people think at the margin.
Rational People
People who systematically and purposefully do the best they can to achieve their objectives.
Marginal Change
A small incremental adjustment to an existing plan of action.
Principle #4
People respond to incentives.
Principle #5
Trade can make everyone better off.
Principle #6
Markets are usually a good way to organize economic activity.
Incentive
Any thing/idea/experience that induces a person to act.
Market Economy
An economy that allocates resources through the decentralized decisions of many firms and households as they interacts in markets for goods and services.
Property Rights
The ability of an individual to own and exercise control over scarce resources.
2 Reasons for a Government to Intervene in an Economy
(1) To promote efficiency
(2) To promote equality
Market Failure
A situation in which a market left on its own fails to allocate resources efficiently.
Externality
The impact of one person’s actions on the wellbeing of a bystander.
Market Power
The ability of a single economic actor (or a small group of actors) to exercise substantial influence over market prices.
Principle #7
Governments can sometimes improve market outcomes.
Principle #8
A country’s standard of living depends on its ability to produce goods and services.
Productivity
The quantity of goods and services produced from each unit of labor input.
Principle #9
Prices rise when the government prints too much money.
Inflation
An increase in the overall level of prices in an economy.
Principle #10
Society faces a short-run trade-off between inflation and unemployment. (Higher levels of inflation lead to lower levels of unemployment.)
Business Cycle
The irregular and unpredictable fluctuations in economic activity (such as variations in the levels of production or unemployment).
