FMSC 290 (Exam 1) Flashcards
An increase in the overall level of prices
Inflation
Fluctuations in economic activity
Business cyle
The property of society getting the most from its scarce resources
Efficiency
Systematically and purposefully doing the best you can to achieve your objectives
Rational
An incremental adjustment to an existing plan
marginal change
an economic system where interaction of households and firms in markets determines the allocation of resources
market economy
the ability of an individual to own and exercise control over scarce resources
property rights
the principle that self-interested market participants may unknowingly maximize the welfare of society as a whole
invisible hand
the ability of an individual or group to substantially influence market prices
market power
the case in which there is only one seller in the market
monopoly
limited resources and unlimited wants
scarcity
study of how society manages its scarce resources
economics
the property of distributing economic prosperity uniformly among society’s members
equality
whatever is given up to get something else
opportunity cost
something that induces a person to act
incentive
a situation in which the market fails to allocate resources efficiently
market failure
when one person’s actions have an impact on a bystander
externality
the amount of goods and services produced from each unit of labor input
productivity
descriptions of the world as it is
positive statements
prescription for how the world ought to be
normative statements
a diagram of the economy that shows the flow of goods and services, factors of production and monetary payments between households and firms
circular flow diagram
a graph that shows the combinations of output the economy can possibly produce given the available factors of production and the available production technology
production possibilities frontier
objective development and testing of theories
scientific method
simplifications of reality based on assumptions
economic models
the inputs such as land, labor, and capital
factors of production
the study of how households and firms make decisions about how they interact in markets
microeconomics
the study of economy-wide phenomena
macroeconomics
the ability to produce a good using fewer inputs than another producer
absolute advantage
the ability to produce a good at a lower opportunity cost than another producer
comparative advantage
the increase in total production due to specialization allowed by trade
gains from trade
goods produces abroad and sold domestically
imports
goods produced domestically and sold abroad
exports
If a producer is self-sufficient, the PPF is also the …
consumption possibilities fronter (CPF)
if all countries have the same opportunity cost of production, then…
there are no gains from trade
countries should specialize in production of goods for which they have…
the comparative advantage
production outside of the PPF can be caused by…
- an advance in technology
- an increase in the capital stock
- an increase in the labor force
- economic growth
Why is the PPF bowed outward?
because the trade-off between the production of any two goods is not constant
the factors of production are owned by…
Firms or Households?
Households
list the four principles of How People Make Decisions
(principles 1-4)
- People Face Trade-offs
- The Cost of Something is What you give up to get it
- rational people think at the margin
- people respond to incentives
List the three principles of How People Interact
(principles 5-7)
- Trade can make everyone better off
- markets are usually a good way to organize economic activity
- governments can sometimes improve market outcomes
List the three principles of How the Economy as a Whole Works
(principles 8-10)
- a country’s standard of living depends on its ability to produce goods and services
- prices rise when the government prints too much money
- society faces a short-run trade-off between inflation and unemployment
