Chapter 1 Flashcards
Every choice involves a trade-off. To obtain something, one must give up something else. This principle is illustrated by the concept of what? and define what that concept means.
opportunity cost - which is the value of the next best alternative forgone when a decision is made
The cost of something is what?
what you give up to get it
The true cost of something is not just the monetary price but also the opportunity cost. understanding this helps individuals and policymakers make informed decisions
Rational people thing at what?
Rational people think at the margin
What does rational people think at the margin mean
Rational decision-makers weigh the marginal benefits and marginal costs of an action. They make decisions based on incremental changes rather than on total costs and benefits
Provide an example of rational people thinking at the margin
A student deciding whether to study for an extra hour will compare the benefits of improved grades against the cost of not having that hour for leisure.
What do people respond to
incentives
explain what it means that people respond to incentives
People’s behavior changes in response to incentives. This principle explains how incentives, both positive and negative, can influence economic decisions.
Provide an example of people respond to incentives
A higher price for a product may encourage producers to supply more of it, and a tax on cigarettes might discourage smoking.
What can trade do for people
make everyone better off
Explain the principle trade can make everyone better off
Trade allows individuals and nations to specialize in what they do best and enjoy a greater variety of goods and services. It is mutually beneficial when parties trade based on comparative advantage.
Provide an example of the principle trade can make everyone better off
Countries benefit from trade by importing goods that they cannot produce efficiently and exporting goods they produce well.
Fill in the blank. Markets are usually a good way to…..
organize economic activity
Why are markets usually a good way to organize economic activity and provide an example
Markets, driven by the forces of supply and demand, allocate resources efficiently. This principle underscores the efficiency of market economies in promoting innovation and economic growth.
In a competitive market, prices adjust to reflect the supply and demand for goods and services.
Explain why governments can sometimes improve Market outcomes
While markets are generally efficient, there are situations where government intervention can correct market failures and promote a more equitable society.
Provide an example of why government can sometimes improve market outcomes
Government regulation can address externalities like pollution or provide public goods like national defense.
A country’s standard of living depends on what
it’s ability to produce goods and service
Why does a country’s standard of living depend on its ability to produce goods and services
Higher productivity leads to higher incomes and a better standard of living.
Example: Technological advancements that increase productivity lead to higher wages and improved living standards.
Explain why prices rise when the government prints too much money
Inflation occurs when there is too much money in the economy relative to the supply of goods and services. This principle explains the relationship between money supply and price levels.
Example: Hyperinflation in historical contexts demonstrates the effects of excessive money printing.
How does society face a short-run trade-off between inflation and unemployment
In the short run, there is a trade-off between inflation and unemployment. Policies that reduce inflation might increase unemployment and vice versa.
Example: The Phillips Curve illustrates this trade-off, showing that policies aimed at reducing inflation can lead to higher unemployment.
Prices rise when governments do what
print too much money
Scarcity
the limited nature of society’s resources
Economics
the study of how society manages its scare resources
Efficiency
society getting the most it can from its scarce resources
Equity
The property of distributing economic prosperity fairly among the members of society
Rational people
people who systematically and purposefully do the best they can to achieve their objectives
marginal changes
small incremental adjustments to a plan of action
Incentive
something that induces a person to act
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
Inflation
an increase in the overall level of prices in the economy
Business cycle
fluctuations in economic activity, such as employment and production
What are the 10 principles of economics
- People face tradeoffs
- the cost of something is what you give up to get it
- Rational people think at the margin
- People respond to incentives
- Trade can make everyone better off
- Markets are usually a good way to organize economic activity
- Governments can sometimes improve market outcomes
- a country’s standard of living depends on its ability to produce goods and services
- Prices rise when the government prints too much money
- Society faces a short-run tradeoff between inflation and unemployment
“People Cost Rational Investors Trading Markets; Good Choices Lift Prices Slowly.”
What is market failure
when the market fails to allocate society’s resources efficiently
What are the causes of market failure
- Externalities
- Market power
What are the externalities that can cause market failure
when the production or consumption of a good affects bystanders ( ie. pollution)
What does it mean when market power causes market failure
a single buyer or seller has substantial influence on market price (e.g. monopoly)
what can public policy promote
market efficiency
define productivity
the amount of goods and services produced per unit of labour
what does productivity depend on
equipment, skills and technology available to workers
What is inflation
increases the general level of prices
in the long run, what is inflation almost always caused by
excessive growth in the quantity of money, which causes the value of money to fall
What happens to the inflation rate when the government creates money
the faster the gov creates money, the greater the inflation rate
