Chapter 1 : Ten Principles of Economics Flashcards
Scarcity
Limited resources and unlimited wants
Economics
Study of how society manages its scarce resources
Efficiency
The property of society getting the most from its scarce resources
Equality
The property of distributing economic prosperity uniformly among society’s members
Rational
Systematically and purposefully doing the best you can to achieve your objectives
Opportunity cost
Whatever is given up to get something else
Marginal changes
Incremental adjustments to an existing plan
Incentive
Something that induces a person to act
Market economy
An economic system where interaction of households and firms in markets determines the allocation of resources
Property rights
The ability of an individual to own and exercise control over scarce resources
“Invisible hand”
The principle that self-interested market participants may unknowingly maximize the welfare of society as a whole
Market failure
A situation in which the market fails to allocate resources efficiently
Externality
When one person’s actions have an impact on a bystander
Market power
The ability of an individual or group to substantially influence market prices
Monopoly
The case in which there is only one seller in the market
Productivity
The amount of goods and services produced from each unit of labor input
Inflation
An increase in the overall level of prices
Business cycle
Fluctuations in economic activity
People face trade-offs = _____ ?
to get more of something we like, we have to give up something else that we like
There is a social trade-off between ____ and ____
EFICIENCY (getting the most from our scarce resources) and EQUALITY (benefits being distributed
uniformly across society)
Why when the government tries to cut the pie into more equal pieces, the pie gets smaller ?
Policies (EX: taxes and welfare) make incomes more equal => reduce returns to hard work => economy doesn’t produce as much
What is the opp.cost when going to university ?
tuition payment + value of time
(NOT room and board payment BECAUSE we have
to eat and sleep whether you are in school or not)
Rational decision makers only proceed with an action if ____
MB > MC
Why do some policies have unintended consequences ?
Because Policies alter MC and MB => alter behavior in an unpredicted manner
Why are markets usually a good way to organize economic activity
- G and S decided by self-interest firms and households are produced in the market (prices and quantities)
- Prices generated by their competitive activity guide
economic activity efficiently.
There are 2 main sources of market failure
a) ____ is when the actions of one person affect the well-being of a bystander (EX: pollution)
b) ____ is when a single person or group can influence the price (EX: monopoly)
a) Externality
b) Market power
Differences in incomes and standards of living are largely attributable to ____
differences in PRODUCTIVITY (the amount of goods and services produced from each unit of labor input)
How to keep inflation low ?
maintain slow growth in the quantity of money (by policies)
In the short-run, what cause a trade-off between inflation and unemployment ?
increase inflation => raises prices and production => more hiring => reduce unemployment
Unemployment
Percent of the labor force that is out of work
Standard of living
Material well-being
