CHAPTER 1: PRINCIPLES OF ECONOMICS Flashcards
Economics comes from what greek word?
What does that word mean?
economy comes from the Greek word oikonomos, which means “one who manages a household.
How is an economy and a household the same?
a household must allocate its scarce resources (time, dessert, car mileage) among its various members, taking into account each member’s abilities, efforts, and desires.
Meaning of scarcity
Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have.
What is economics?
Economics is the study of how society manages its scarce resources
Name three things an economist does.
Economists, therefore, study how people make decision
Economists also study how people inter-act with one another.
economists analyze the 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
Name different kinds of trade-offs
What is “guns and butter”
One classic trade-off is between “guns and butter.” The more a society spends on national defense (guns) to protect its shores from foreign aggressors, the less it can spend on consumer goods (butter) to raise the standard of living at home
Meaning of efficiency.
Meaning of equality.
Efficiencymeans that society is getting the maximum benefits from its scarce resources
Equal-ity means that those benefits are distributed uniformly among society’s members
In other words, efficiency refers to the size of the economic pie, and equality refers to how the pie is divided into individual slices.
How can equality and efficiency come into conflict when government policies are designed?
Consider, for instance, policies aimed at equalizing the distribution of economic well-being. Some of these policies, such as the welfare system or unemployment insurance, try to help the members of society who are most in need. Others, such as the in-dividual income tax, ask the financially successful to contribute more than others to support the government. Though they achieve greater equality, these policies reduce efficiency. When the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods and services
What is opportunity cost?
The opportunity cost of an item is what you give up to get that item.
How do you define rational people?
Rational people systemat-ically and purposefully do the best they can to achieve their objectives, given the available opportunities.
What does marginal of cost refer to?
When does a rational decision maker take an action?
A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost
What is an incentive?
An incentive is something (such as the prospect of a punishment or reward) that induces a person to act
“People respond to incentives. The rest is commentary.”
Explain.
