Chapter 1: What is Economics? Flashcards
“oikonomos” (Greek)
* “One who manages a
household”
economy
many decisions
* Allocate scarce resources
* Ability, effort, and desire
* Wants and need
household
many decisions
* Allocate resources
* Allocate output
society
Resources are _____
scarce
the limited nature of society’s resources
scarcity
he study of how society manages its scarce resources
economics
economists study (3)
- How people make decisions
- How people interact with one another
- Analyze forces and trends that affect the economy as a whole
how people make decisions
principle 1:
People face trade-offs
the property of society getting the most it can from its scarce resources
efficiency
the property of distributing economic prosperity uniformly among the members of society
equality
how people make decisions
principle 2
The cost of something is what you give up to get it
Compare cost with benefits of alternatives
make decisions
whatever must be given up to obtain some item
opportunity cost
how people make decisions
principle 3
Rational people think at the margin
Systematically & purposefully do the best they can to achieve their objectives
rational people
Small incremental adjustments to a plan of action
marginal changes
Rational decision maker – take action only if
Marginal benefits > Marginal costs
Something that induces a person to act
incentive
Buyers - consume less
Sellers - produce more
higher price
Change costs or benefits
Change people’s behavior
public policy
how people make decisions
principle 4
People respond to incentives
Car size & fuel efficiency; carpool; public transportation
gasoline tax
Policymakers fail to consider how their policies affect incentives
unintended consequences
how people interact
principle 5
trade can make everyone better off
Specialization
* Allows each person/country to specialize in the activities he/she does best
- People/countries can buy a greater variety of goods and services at lower cost
trade
how people interact
principle 6
Markets are usually a good way to organize economic activity
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
guided by prices and self interest
adam smith’s “invisible hand”
market economy
communist countries
central planning
Allocate economy’s scarce resources
* Decided
* What goods & services were produced
* How much was produced
* Who produced & consumed these goods & services
government officials (central planners)
how people interact
principle 7
Governments can sometimes improve market outcomes
the ability of an individual to own and exercise control over scarce resources
property rights
a situation in which a market left on its own fails to allocate resources efficiently
market failure
causes for market failure
the impact of one person’s actions on the well-being of a bystander
externality
causes for market failure
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
market power
disparities in economic wellbeing
- market economy
- government intervention
ability to produce things that other people are willing to pay for
reward people
- May diminish inequality
- Process far from perfect
public policies
how the economy as a whole works
principle 8
A country’s standard of living depends on its ability to produce goods and services
A country’s standard of living depends on its ability to produce goods and services
principle 8
Quantity of goods & services produced from each unit of labor input
productivity
Large differences in living standards
- among countries
- over time
explanation: differences in productivity
Higher standard of living
higher productivity
Determines growth rate of its average income
growth rate of nation’s productivity
Causes for large / persistent inflation
- Growth in quantity of money
- Value of money falls
How the Economy as a Whole Works
- Prices rise when the government prints too much money
principle 9
An increase in the overall level of prices in the economy
inflation
How the Economy as a Whole Works
- Society faces a short-run trade-off between inflation and unemployment
principle 10
Short-run effects of monetary injections:
- stimulates
- firms
- overall level of spending
- Higher demand for goods and services
stimulates
– raise prices; hire more workers; produce more goods and services
* Lower unemployment
firms
fluctuations in economic activity, such as employment and production
business cycle
More hiring means
lower unemployment
Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of _____ and ____
good and services
(4) How People Make Decisions
- 1: People Face Trade-offs
- 2: The Cost of Something Is What You Give Up to Get It
- 3: Rational People Think at the Margin
- 4: People Respond to Incentives
(3) How People Interact
- 5: Trade Can Make Everyone Better Off
- 6: Markets Are Usually a Good Way to Organize Economic Activity
- 7: Governments Can Sometimes Improve Market Outcomes
(3) How the Economy as a Whole Works
- 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
- 9: Prices Rise When the Government Prints Too Much Money
- 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
