Economics Chap 1 Flashcards
Econ from the greek word
“Oikonomia” means household
management
-study of how society manages its scarce resources
Economics
how individuals within a society generally make choices
that involve the use of scarce resources from among
alternative wants that need to be satisfied
Economics
The limited nature of society’s resource
An economic condition wherein there is no enough
resources to satisfy all the demands of the people
Scarcity
Importance of Studying Economics
Economics affects daily life
Economics helps render more informed decisions
Makes us more effective citizens
BRANCHES OF
ECONOMICS
Microeconomics
Macroeconomics
-how households and individuals spend their budgets
Microeconomics
-determines the level of economic activity in a society
Macroeconomics
-one produces a good or service is divided into a number of tasks
that different workers perform, instead of all the tasks being done
by the same person.
Division and Specialization of Labor (Adam Smith’s Wealth of
Nations)
The value of the good or service foregone.
The value of the next best choice that you give up when
you make an economic/rational decision.
Opportunity Cost
Costs that we make in the past that we cannot recover.
Sunk Cost
people who systematically and purposefully do the
best they can to achieve their objectives given the available
opportunities.
Rational People
small incremental adjustments to a plan of
action.
Marginal Changes
-typically an agricultural economy where things are done the
same as they have always been done.
Traditional Economy
- economic decisions are passed down from government
authority and where the government owns the resources.
Command Economy
- an economy where economic decisions are decentralized, private
individuals own resources, and businesses supply goods and services
based on demand.
Market Economy
Two kinds of decision makers
Firms
Households
the ones that produce goods and services using
inputs, such as the factors of production:
Labor, Land, Capital
Firms
the ones who own the factors of production
and consume all the goods and services that firms produce
Household
refers to a visual model of the economy that shows how
money flows through markets among households and firm
Circular Flow of Economy Model
Two Types of Markets
- Markets for goods and services
- Markets for the factors of production
- households are buyers and firms are
sellers; households buy the output of goods and services that firms
produce
Markets for goods and services
households are sellers and firms
are buyers; household provide firms the inputs that the firms use to
produce goods and services
Markets for the factors of Production
- Produce and sell
goods and services * Hire and use factors of production
Firms
- Buy and consume goods and services
- Own and sell factors of production
Households
- Households sell
- Firms buy
Markets for Factors of production
- Firms sell
- Households buy
markets for goods and services
The principles of
HOW PEOPLE
MAKE DECISIONS
Principle 1 People Face Tradeoffs
Principle 2 The Cost of Something Is What You Give Up to Get It
Principle 3 Rational People Think at the Margin
Principle 4 People Respond to Incentives
The principles of
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 Government can sometimes improve market outcomes
The principle of how the economy as a whole
Principle 8 A country’s standard of living depends on its capability to produce goods and services
Principle 9 Prices rise when the government prints too much money
Principle 10 Society faces a short run trade offf between inflation and unemployment
All decisions involve tradeoffs.
PRINCIPLE 1
People Face Tradeoffs
Making decisions requires comparing the costs
and benefits of alternative choices.
The opportunity cost of any item is
whatever must be given up to obtain it.
It is the relevant cost for decision making.
PRINCIPLE 2
The Cost of Something Is
What You Give Up to Get It
make decisions by evaluating costs and benefits
of marginal changes, incremental adjustments
to an existing plan.
PRINCIPLE 3
Rational People Think at the Margin
something that induces a person to
act, i.e. the prospect of a reward or punishment.
Incentive
Rational people respond to incentives.
something that induces a person to act, i.e. the prospect of a reward or punishment.
PRINCIPLE 4
People Respond to Incentives
Rather than being self-sufficient,
people can specialize in producing one good or
service and exchange it for other goods.
Countries also benefit from trade and
specialization:
Get a better price abroad for goods they
produce
Buy other goods more cheaply from abroad
than could be produced at home
Principle 5 Trade can make everyone better off
a group of buyers and sellers
(need not be in a single location)
Market
“Organize economic activity” means determining
what goods to produce
how to produce them
how much of each to produce
who gets them
PRINCIPLE 6
Markets Are Usually A Good Way to
Organize Economic Activity
allocates resources through
the decentralized decisions of many households
and firms as they interact in markets.
Market economy
A market economy allocates resources through
the decentralized decisions of many households
and firms as they interact in markets.
Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being.
PRINCIPLE 6
Markets Are Usually A Good Way to
Organize Economic Activity
Important role for govt:
Enforce property rights
People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen.
Govt may alter market outcome to
promote equity.
PRINCIPLE 7
Governments Can Sometimes
Improve Market Outcomes
Huge variation in living standards across
countries and over time:
Average income in rich countries is more than
ten times average income in poor countries.
The U.S. standard of living today is about
eight times larger than 100 years ago.
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services
the amount of goods
and services produced per unit of labor.
Productivity
In the long run, inflation is almost always caused
by excessive growth in the quantity of money,
which causes the value of money to fall.
The faster the govt creates money,
the greater the inflation rate.
PRINCIPLE 9
Prices Rise When the Government Prints
Too Much Money
In the short-run (1–2 years),
many economic policies push inflation and
unemployment in opposite directions.
Other factors can make this tradeoff more or less
favorable, but the tradeoff is always present.
PRINCIPLE 10
Society Faces a Short-run Tradeoff Between
Inflation and Unemployment
10 Principles of econ
PRINCIPLE 1: PEOPLE FACE TRADE-OFFS
PRINCIPLE 2: THE COST OF SOMETHING IS
WHAT YOU GIVE UP TO GET IT
PRINCIPLE 3: RATIONAL PEOPLE THINK AT THE
MARGIN
PRINCIPLE 4: PEOPLE RESPOND TO INCENTIVES
PRINCIPLE 5: TRADE CAN MAKE EVERYONE BETTER OFF
PRINCIPLE 6: MARKETS ARE USUALLY A GOOD WAY TO
ORGANIZE ECONOMIC ACTIVITY
PRINCIPLE 7: GOVERNMENTS CAN SOMETIMES IMPROVE
MARKET OUTCOMES
PRINCIPLE 8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON
ITS ABILITY TO PRODUCE GOODS AND SERVICES
PRINCIPLE 9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO
MUCH MONEY
PRINCIPLE 10: SOCIETY FACES A SHORT-RUN TRADE-OFF
BETWEEN INFLATION AND UNEMPLOYMENT
