Chapter 1: Ten Principles of Economics Flashcards
What is the concept of trade-offs?
Choosing one option means giving up another (e.g., work vs. leisure).
What is the trade-off between efficiency and equality?
Efficiency maximizes resource use, while equality ensures fair distribution.
Define opportunity cost.
The value of the next best alternative foregone.
Give an example of opportunity cost.
The cost of college includes tuition + lost earnings from not working.
What does it mean to think at the margin?
Making decisions based on small incremental changes.
When does a rational decision occur?
When marginal benefit ≥ marginal cost.
How do people respond to incentives?
Incentives influence behavior (e.g., higher gas prices → more fuel-efficient cars).
How does trade benefit people?
It allows specialization and increases the variety of goods available.
What is a market economy?
An economy where decisions are made by individuals and firms rather than a central authority.
What is Adam Smith’s ‘invisible hand’?
The idea that markets self-regulate through supply, demand, and pricing.
What are market failures?
Situations where markets do not allocate resources efficiently.
Name two common causes of market failure.
Externalities (e.g., pollution) and market power (e.g., monopolies).
Why does the government enforce property rights?
To ensure trust in markets and encourage economic activity.
What determines a country’s standard of living?
Productivity – the amount of goods and services produced per worker.
What is inflation?
A general increase in prices due to too much money in circulation.
What happens when the government prints too much money?
Inflation increases, decreasing the value of money.
What is the short-run trade-off between inflation and unemployment?
Reducing unemployment can lead to higher inflation and vice versa.
