Chapter 4: Ten principles of Economics Flashcards
What are the 10 principles of economics
- People Face Trade-off
- The Cost of something is what you give up to get it
- Rational people think at a margin
- People respond to incentives
- Trade can make everyone better off
- Markets are usually a good way to organize economic activity
- Governments are sometimes improve market outcomes
- Country’s standard of living depends on the ability to produce goods and service
- Prices rise when government prints too much money
- Society face short-run trade-off between inflation and unemployment
To get one thing they like, they usually have to give up another thing they like.
People Face Trade-off
The cost of something is what you give up to get it, not just in terms of monetary costs but all ________________.
opportunity costs
True or False
Because people face trade-offs, making decisions doesn’t requires comparing the costs and benefits of alternative courses of actions.
False
Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of actions.
Rational people think at a margin by taking an action if and only if the __________________.
marginal benefits exceed the marginal costs.
are incremental changes to an existing plan.
Marginal Changes
True or False
Rational decision makers only proceed with an action if the marginal benefit is greater than marginal cost
True
True or False
People respond to incentives because as they compare benefits to costs, a change in incentives may cause their behavior to change.
True
THE PRINCIPLES OF INDIVIDUAL DECISION MAKING
Principle 1: People face trade-off
Principle 2: The Cost of something is what you give up to get it.
Principle 3: Rational People think at a margin
Principle 4: People respond to incentives
Since rational people weigh marginal costs and marginal benefits of activities, they will respond when _______________________.
these costs or benefits change.
PRICIPLES CONCERNING ECONOMIC INTERACTIONS (HOW PEOPLE INTERACT)
Principle 5: Trade can make everyone better off
Principle 6: Markets are usually a good way to organize economic activity
Principle 7: Governments are sometimes improves market outcomes
can make everyone better off because it allows countries to specialize in what they do best and to enjoy a wider variety of goods and services.
Trade
Trade is not a contest _____________
where one wins and one loses
allows each trader to specialize in what they do best, whether it be farming, constructing, or manufacturing, and trade their output for the output of other efficient producers (this is true for countries as it is for individuals)
Trade
Trade allows people to specialize in the production of goods for which they have _________________ and then trade for goods that other people produce.
comparative advantage
Because of specialization, total output _________ and through trade we are all able to share the bounty.
rises
True or False
People produce because they wish to trade and get something in return, hence trade makes us independent.
True
To understand the source of gains from trade when one producer is____________, one must understand the concept of ___________________________.
better at producing both products; comparative advantage and absolute advantage
Compares the quantity of inputs required to produce a good/actual cost of production
absolute advantage
Compares opportunity costs of production for each producer
comparative advantage
The most efficient producer has an _________________
absolute advantage
The producer with the lower opportunity cost of production is said to have a ____________________
comparative advantage
The producer that requires fewer resources to produce a good is said to have an ____________ in the production of that good.
absolute advantage
The decision to specialize and the resulting gains from trade are based on ____________.
comparative advantage
True or False
A single producer can have an comparative advantage in the production of both goods but he/she cannot have a absolute advantage in the production of both goods because a low opportunity cost of producing one good implies a high opportunity cost of producing the other good.
False
A single producer can have an absolute advantage in the production of both goods but he/she cannot have a comparative advantage in the production of both goods because a low opportunity cost of producing one good implies a high opportunity cost of producing the other good.
True or False
Trade slows producers to exploit the differences in their opportunity costs of production
True
