Introduction: Principles Of Economics Flashcards
What are the two key aspects that need to be balanced in economic decision-making according to Mankiw’s principles?
Answer: Efficiency and equity. Efficiency means society gets the most from scarce resources, while equity refers to fair distribution of benefits among society members.
Explain the concept of opportunity cost with an example.
Answer: Opportunity cost is what you give up to get something. For example, if you spend time studying economics, the opportunity cost might be the time you could have spent working or pursuing other activities.
What is the difference between positive and normative analysis in economics?
Answer: Positive analysis involves statements about how the world operates (facts), while normative analysis involves statements about how the world should be (value judgments/policy advice).
Compare weak and strong sustainability concepts.
Answer: Weak sustainability has a lower emphasis on natural capital and allows its depletion if there are stronger benefits, while strong sustainability emphasizes the preservation of natural capital as non-negotiable.
How does ecological economics differ from neoclassical economics in terms of priorities?
Answer: Neoclassical economics prioritizes consumer sovereignty and efficiency, while ecological economics emphasizes individual/social health and sustainability as central criteria.
What is meant by “thinking at the margin” in economic decision-making?
Answer: Thinking at the margin refers to making decisions based on small, incremental adjustments to existing plans, considering the additional benefits or costs of one more unit.
What is the “invisible hand” concept and how does it relate to market economies?
Answer: The invisible hand, conceived by Adam Smith, refers to price as the guiding force in market economies, where resources are allocated through decentralized decisions of firms and households interacting in markets.
How has the perspective on environment changed from classical to neoclassical economics?
Answer: Classical economics viewed the environment as a limit to economic activity, while neoclassical economics focuses on relative scarcity and believes that with proper economic management, living standards can rise indefinitely.
What are the four main focus areas of economics mentioned?
Answer: The focus areas are:
1. How people make decisions
2. How people interact
3. Organization of economies
4. Forces and trends affecting the economy as a whole
When and why might governments intervene in markets according to economic principles?
Answer: Governments might intervene in markets in two situations:
1. To address market failures (when markets fail to allocate resources efficiently)
2. For equity concerns (to ensure fair distribution of resources)
What does economics study?
How society manages scarce resources
Explain scarcity
- resources are scarce (limited)
- we need to find a way to manage resources to meet people’s needs
What are Mankiw’s Principles of Economics?
- People Face Tradeoffs
- Opportunity Cost
- Rational People Think at the Margin
- Response to Incentives
- Trade Makes Everyone Better Off
- Markets are a Good Way to Organize Economic Activity
- Governments can sometimes improve Market Outcomes
When do people choose one alternative over another?
People choose one alternative over another occurs when the alternatives’s marginal benefits exceed marginal costs
Explain how trade makes everyone better off
- Allows specialization
- Creates gains through competition
- People gain from their ability to trade with one another
- Obviously may not play out in real life - countries have varying interests (e.g. political) which may lead them to protect inefficient industries
