CHP. 1 - First Principles Flashcards
Every economic issue involves an:
Individual choice
What’s the first principle of individual choice?
People must make choices because resources are scarce.
- Limited income prevents people from buying whatever they want.
- Limited resources/time
(Only 24 hours in a day)
What’s the second principle of individual choice?
The true cost of something is its opportunity cost.
- All costs are opportunity costs.
What’s the third principle of individual choice?
“How much” a decision is at the margin.
-some decisions require “trade off”
- decisions of this type is whether to do a bit MORE or LESS of an activity. This is known as marginal decisions.
The study of decisions is known as:
Marginal analysis
What’s the fourth principle of individual choice?
People respond to incentives, exploiting opportunities to make themselves better off.
- EX: a bonus given to employee for exceeding sales targets
What are the factors of production?
Resources: (land, labor)
Physical Capital (machines, tools)
Human Capital (Knowledge, experience)
Technology
What’s the fifth principle of individual choice?
There are gains to trade.
-The key for a better standard of life is trade.
-Allows us to consume more than we normally would
- Gains arise from the division of tasks called specialization.
What’s the sixth principle of individual choice?
Markets moves towards equilibrium.
Because people respond to incentives, the market moves towards a state of balance, known as equilibrium.
No individual would be better off doing something different.
What’s the seventh principle of individual choice?
Resources should be used efficiently to achieve society’s goals.
-an economy is efficient if it takes all opportunities to make people better off without making them worse off.
Efficiency and equity are often at odds.
EX: maximizing productivity and minimizing costs
What’s the eighth principle of individual choice?
Markets usually lead to efficiency, but when they don’t, government intervention can improve society’s welfare.
-in case of market failures, the pursuit of self interest makes society worst off.
- when markets don’t achieve efficiency, the government can intervene to improve society’s well fare.
What’s the ninth principle of individual choice?
One person’s spending is another person’s income.
-During RECESSIONS, a drop in business spending leads to less income, spending and more drops in business spending, layoffs and rising unemployment
What’s the tenth principle of individual choice?
Overall spending sometimes gets out of life with the economy productive capacity, when it does, government policy can change spending.
-OVERALL SPENDING, sometimes doesn’t match the amount the economy is capable of producing.
- When the overall spending falls short of what is needed to keep workers employed, the economy experiences recession.
- spending outstrips the supply = inflation
- GOV. Policy’s can be used to address imbalances
What’s the eleventh principle of individual choice?
Increases in the economy’s potential lead to economic growth overtime.
-emergence of new technologies and increased resources available for production boosts the economy potential.
