Chapter 1 Flashcards
SCARCITY
society has limited resources & therefore cannot produce all the goods and services people wish to have.
–> Each individual in society = cannot attain the highest standard of living to which he or she might aspire
ECONOMICS
is the study of how society manages its scarce resources.
–>Economists study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings
Economists also study:
► How people interact with one another
For instance, they examine how the multitude of buyers & sellers of a good together determine the price at which the good is sold and the quantity that is sold.
► Economists analyze forces and trends that affect the economy as a whole
–> including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.
ECONOMY
is just a group of people interacting w/ one another as they go about their lives
TRADE-OFFS
to get one thing that we like, we usually have to give up another thing we like
EFFICIENCY
the property of society getting the most it can from its scarce resources (size of the economic pie)
EQUITY
the property of distributing economic prosperity fairly among the members of society (how the pie is divided into individual sizes)
OPPORTUNITY COST of an item
what you GIVE UP to get that item
–> When making any decision, decision makers should be aware of the opportunity cost that accompany each possible action
–>An opportunity cost = an opportunity lost
RATIONAL PEOPLE
They know that decisions in life = rarely black & white
–> but usually involve shades of grey
Example: when exams roll around, your decision is not between blowing them off or studying 24 hours a day (black-and-white) --> but whether to spend an extra hour reviewing your notes instead of watching TV
MARGINAL CHANGES
describes small incremental adjustments to an existing plan of action
–>So marginal changes = adjustments around the edges of what you are doing
► Rational people = often make decisions by comparing marginal benefits & marginal costs ► Marginal benefit > marginal cost (will prompt them)
INCENTIVE
is something (such as the prospect of a punishment or a reward) that includes a person to act
–> b/c rational people make decisions by comparing costs & benefits, they respond to incentives
–>Incentives = crucial to analyzing how markets work.
► A higher price in a market provides an incentive for buyers to consume less & an incentive for sellers to produce more
–>The influence of prices on the behaviour of consumers & producers = crucial for how the market economy allocates scarce resources
Trade Can Make Everyone Better Off
Trade between two countries = can make each country better off
–>Trade allows each person to specialize in the activities he or she does best –> whether it is farming, sewing, or home building
–>By trading with others –> people can buy a greater variety of goods & services at lower cost
MARKET ECONOMY
an economy that allocates resources through the decentralized decisions of many firms & households as they interact in markets for goods & services
–> Firms decide whom to hire & what to make
–> Households decide which firms to work for & what to buy w/ their incomes
These firms & households interact in the marketplace
–> where prices and self-interest guide their decisions
… in a market economy:
no one = looking out for the economic well-being of society as a whole
–> Free markets contain many buyers & sellers of numerous goods & services –> and all of them are interested primarily in their own self-being
–> Yet, despite centralized decision making & self-interested decision makers –> market economies have proven remarkably successful in organizing economic activities to promote overall economic well-being
Governments Can Sometimes Improve Market Outcomes
if the invisible hand = so great, why do we need government?
–> The invisible hand can work its magic only if the government enforces the rules & maintains the institutions that are key to a market economy
–>Most important, market economies = need institutions to enforce property rights–so individuals can own & control scarce resources
2 reasons why markets need gov’t intervention
- To promote efficiency
- To promote equity
–> That is, most policies = aim either to enlarge the economic pie or to change how the pie is divided
MARKET FAILURE
a situation in which a market left on its own fails to allocate resources efficiently
–> One possible cause of market failure is externality.
EXTERNALITY
the impact of one person’s actions on the well-being of a bystander
Example: Pollution.
–> market left on it’s own may fail to take the cost of others’ health into consideration
CAUSES OF MARKET FAILURE
- externality
- market power
MARKET POWER
ability of a single person or firm (or a small group) to unduly influence market prices
Example: if there’s only one well, the owner can charge higher prices b/c it is needed and not subjected to any competition.
Goal of economic efficiency
Therefore, in the presence of externalities or market power –> well-designed public policy can enhance economic efficiency
Goal of equity
Even when the invisible hand = yielding efficient outcomes –> it nonetheless leave disparities.
–>The invisible hand does not ensure that everyone = has sufficient food, decent clothing, and adequate health care
–> This inequality (depending on one’s political philosophy) –> call for gov’t intervention
PRODUCTIVITY
the amount of goods and services produce from each unit of labour unit.
–>In most nations where there’s high productivity most enjoy a high standard of living; vice versa.
–> Similarly, the growth rate of a nation’s productivity determines the growth rate of its average income
If productivity = the primary determination of living standards –> other explanations must be of secondary explanations
INFLATION
an increase in the overall level of prices in the economy
–> This particular example = highlights the problem of hyperinflation when prices are increasing at a rate of more than 50% a month.
What causes inflatation?
(in large or persistent inflation) growth in the quantity of money.
–> When a gov’t = creates large quantities of the nation’s money –> the value of the money falls
Society Faces a Short-Run Trade-off between Inflation and Unemployment
Although a higher level of prices is, in the long run, the primarily effect of increasing the quantity of money –> the short-run story is more complex & more controversial
–> this line of reasoning = leads to one final economy-wide trade-off: a short-run trade-off between inflation & unemployment.
Most accept that society = faces a short-run trade-off between inflation and unemployment
- This simply means that, over a period of a year or two
- -> many economic policies = push inflation and unemployment in opposite directions
- Policymakers face this trade-off regardless of whether inflation & unemployment = both start out at high levels or somewhere in between.
- This short-run trade-off plays a key role in the analysis of the business cycle
BUSINESS CYCLE
the irregular & largely unpredictable fluctuations in economic activity –> as measured by the production of goods & services or the # of people employed
–>Policymakers can exploit the short-run trade-off between inflation & unemployment –> using various policy instruments
