Exam 1 Flashcards
Scarcity
Society has limited resources and therefore cannot produce all the goods and services people wish to have
Economy
Comes from Greek word oikonomos, which means “one who manages a household”
Economics
The study of how society manages it’s scarce resources
Economists study…
How people make decisions: how much they work, what they buy, how much they save, and how they invest.
Analyze forces and trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.
Principle 1
People face trade-offs
To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another
Efficiency
Society is getting the maximum benefits from it’s scarce resources
Equality
The property if distributing economic prosperity uniformly among the members of society
Principle 2
The cost of something is what you give up to get it.
Not usually just money can also be time or other goods
Opportunity cost
What you give up to get that item
Principle 3
Rational people think at the margin
Rational people know that decisions in life are rarely black and white but usually involve shades of gray
Rational people
People who systematically and purposefully do the best they can to achieve their objects
Marginal cost
A small incremental adjustment to an existing plan of action
Marginal adjustments
Adjustments around the edges of what you are doing
Principle 4
People respond to incentives
Incentive
Something that induces a person to act, such as the prospect of punishment or a reward
Principle 5
trade can make everyone better off
Principle 6
Markets are usually a good way to organize economic activities
Centrally planned economies
Only the government could analyze economic activity in a way that promoted economic well-being for the country as a whole
Market economy
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Adam Smith
Book “An Inquiry into the Nature and causes of the wealth of nations”
in 1776: made the most famous observation in all of economics: Households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes
Principle 7
Governments can sometimes improve market outcomes
we need the government to enforce the rules and maintain the institutions that are key to a market economy
Property rights
the ability of an individual to own and exercise control over scarce resources
Market failure
a situation in which a market left on its own fails to allocate resources efficiently
Externality
the impacts of one person’s actions on the well-being of a bystander
ex. pollution
market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
ex. if everyone in town needs water but there is only one well, the owner of the well is not subject to the rigorous competition with which the invisible hand normally keeps self-interest in check
Principle 8
A country’s standard of living depends on its ability to produce goods and services
Productivity
the quantity of goods and services produced from each unit of labor input
Principle 9
prices rise when the government prints too much money
Inflation
an increase in the overall level of prices in the economy
Principle 10
the society faces a short-run trade-off between inflation and unemployment
short-run effects of monetary injections
increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services
higher demand may over the time cause firms to rise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services
more hiring means lower unemployment
business cycle
fluctuations in Economic activity, such as employment and production
Circular-flow diagram
a visual model of the economy that shows how dollars flow through markets among households and firms
REFER TO DIAGRAM pg. 25
Production possibilities frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
Microeconomics
the study of how households and firms make decisions and how they interact in markets
Macroeconomics
the study of economywide phenomena, including inflation, unemployment, and economic growth
Positive statements
claims that attempt to describe the world as it is
Normative statements
claims that attempt to prescribe how the world should be
absolute advantage
the ability to produce a good using fewer inputs than another producer
Opportunity cost
whatever must be given up to obtain some item
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
imports
goods produced abroad and sold domestically
exports
goods produced domestically and sold abroad
Market
a group of buyers and sellers of a particular good or service
Competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact of the market price
quantity demanded
the amount of a good that buyers are willing and able to purchase
law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
Demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
demand curve
a graph of the relationship between the price of a good and the quantity demanded
normal good
a good for which, other things equal, an increase in income leads to an increase in demand
Inferior good
a good which, other things equal, an increase in income leads to a decrease in demand
Substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
Quantity supplied
the amount of a good that sellers are willing and able to sell
Law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
supply curve
a graph of the relationship between the price of a good and the quantity supplied
Equilibrium
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
Equilibrium price
the price that balances quantity supplied and quantity demanded
equilibrium quantity
the quantity suppled and the quantity demanded at the equilibrium price
surplus
a situation in which quantity supplied is greater than quantity demanded
shortage
a situation in which quantity demanded is greater than quantity supplied
law of supply and demand
the claim that the price of any good adjust to bring the quantity suppled and the quantity demanded for that good into balance
