Chapter 1 Flashcards
What are the three economic ideas?
- People are rational.
- People respond to economic incentives.
- Optimal decisions are made at the margins.
What are the three economic questions that every society must solve?
(what/how/who)
- What goods/services will be produced?
- How will goods/services be produced?
- Who will receive goods/services produced?
Define scarcity.
A situation where unlimited wants exceed the resources available to fulfill those wants.
Define economics.
The study of choices people make to attain their goals, given limited resources.
Define economic models.
Simplified versions of reality used to analyze real-world economic situations.
Define market.
A group of buyers and sellers and the arrangement by which they come together to trade.
Define marginal.
Extra/additional/greater.
Define marginal analysis.
An analysis involving comparing marginal benefits to marginal costs.
Define trade-off.
The idea that, because of scarcity, producing more of one product or service means producing less of another product or service.
Define opportunity cost.
The highest valued alternative that must be given up to engage in an activity.
Define centrally-planned economy.
When the government decides how economic resources are to be allocated.
Define market economy.
When the allocation of economic resources are determined by the decisions of households and firms.
Define mixed economy.
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
Define productive efficiency.
When a good or service is produced at the lowest possible cost.
Define allocative efficiency.
When a good or service is produced according to consumer preferences.
