L1: introduction to economics + the ten principles of economics Flashcards
what is the origin of the term “economics”
Greek word “Oikonomia” which means
household management
economics is the study of?
study of how society manages its scarce resources
definition of 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
how does household management relate to economics?
- they are both dealing with making many decisions on how to;
- allocate/manage limited resource among its members
define scarcity
- the limited nature(/shortage) of society’s resource
An economic condition wherein there is no enough
resources to satisfy all the demands of the people
scarcity
give examples of shortage
- e.g. shortage of water on aftrica
- e.g. shirtage of alcohol/face masks/face sheild/vaccine/etc. nung pandemic
- e.g. oil (due to russia vs ukraine)/
- e.g. bigas, sibuyas, etc.
enumerate the Importance of Studying Economics
- Economics affects daily life
- Economics helps render more informed decisions
- Makes us more effective citizens
(economics helps us understand because we understand why inflation is high, why there are shortages, why there is so much unemployment etc.)
enumerate the branches of economics
(and differentiate them briefly)
- microeconomics
- internal
- households
- individuals - macroeconomics
- external
- society
- as a whole
how households and individuals spend their budgets
microeconomics
determines the level of economic activity in a society
macroeconomics
it concerns the internal issues of a country
microeconomics
it considers the external issues (larger scale)
macroeconomics
examples of this are:
- personal consumption
- personal budgeting
microeconomics
examples of this are:
- gross domestic product
- inflation
- unemployment
macroeconomics
fill in the blanks and answer who stated it:
“one produces a good or service is _____________ into a number of tasks that ________________________________, instead of all the tasks being ________________________.”
Division and Specialization of Labor (Adam Smith’s Wealth of Nations)
“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.”
DIVISIONS OF ECONOMICS
“Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by the invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectually than when he really intends to prove it”
- Adam Smith (The Wealth of Nations)
enumerate the economic systems
(and differentiate them briefly)
- Traditional economy
- agriculture
- unchanging - Command economy
- centralized governance
- the government owns everything - Market economy
- decentralized
- private individuals owns resources, etc.
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
an economic system that’s a good way to organize the economy and economic activities and also promotes economic wellbeing
market economy
typically an agricultural economy where things are done the same as they have always been done.
traditional economy
the government owns all properties and resources
command economy
an economic system that still uses barter and trade
traditional economy
north korea
command economy
usa
market economy
canada
traditional economy
what economic system does our country have?
mixed economy
- traditional + market economy
enumerate the two kinds of decision-makers and define them
- Firms
- the ones that produce goods and services using inputs, such as the factors of production:
> Labor
> Capital
> Land - Household
- the ones who own the factors of production and consume all the goods and services that firms produce
refers to a visual model of the economy that shows how money flows through markets among households and firm
Circular Flow of Economy Model
enumerate the Two Types of Markets and define them
- Markets for goods and services - households are buyers and firms are sellers; households buy the output of goods and services that firms produce
- Markets for the factors of production - households are sellers and firms are buyers; household provide firms the inputs that the firms use to produce goods and services
- input such as labor
what are the 10 principles of economics?
PTRPTMGAPS
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
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 & Services
PRINCIPLE 9: Prices Rise When the Government Prints Too Much Money
PRINCIPLE 10: Society Faces a Short-run Tradeoff Between Inflation and Unemployment
who created the 10 principles of economics?
Nicholas Gregory Mankiw
- 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.
under principle 2:
OPPORTUNITY COST
- Costs that we make in the past that we cannot recover.
under principle 2:
SUNK COST
who systematically and purposefully do the best they can to achieve their objectives given the available opportunities.
under principle 3:
RATIONAL PEOPLE
small incremental adjustments to a plan of
action.
under principle 3:
MARGINAL CHANGES
something that induces a person to
act, i.e. the prospect of a reward or punishment.
under principle 4:
INCENTIVE
a group of buyers and sellers (need not be in a single location)
under principle 6:
MARKET
allocates resources through the decentralized decisions of many households and firms as they interact in markets.
under principle 6:
MARKET ECONOMY
- This means that we all have the freedom to buy the properties that we want, products/services that we need, and firms has right to produce, etc.
- People have met their basic survival need and have enough/sufficient income to prosper
economic well-being
- llustrates the hidden economic factors that affect/guide the buying behavior of the
consumers(households) and the activities of sellers/firms/etc. - eg. price, quality, credibility, quantity, self-interest(base on the benefits that they will get in the product),
under principle 6:
THE INVISIBLE HAND
- the amount of goods and services produced per unit of labor.
- depends on the equipment, skills, and technology available to workers.
under principle 8:
PRODUCTIVITY
increases in the general level of prices.
under principle 9:
INFLATION
Examples:
Going to a party the night before your midterm
leaves less time for studying.
Having more money to buy stuff requires
working longer hours, which leaves less time
for leisure.
Protecting the environment requires resources
that could otherwise
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.
Examples:
The opportunity cost of…
…going to college for a year is not just the tuition,
books, and fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.
PRINCIPLE 2: The Cost of Something Is What You Give Up to Get It.
systematically and purposefully do the best they
can to achieve their objectives.
make decisions by evaluating costs and benefits
of marginal changes, incremental adjustments
to an existing plan.
PRINCIPLE 3: Rational People Think at the Margin
Examples:
When a student considers whether to go to
college for an additional year, he compares the
fees & foregone wages to the extra income
he could earn with the extra year of education.
When a manager considers whether to increase
output, she compares the cost of the needed
labor and materials to the extra revenue.
PRINCIPLE 3: Rational People Think at the Margin
Examples:
When gas prices rise, consumers buy more
hybrid cars and fewer gas guzzling SUVs.
When cigarette taxes increase,
teen smoking falls.
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
“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
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
The invisible hand works through the price
system:
The interaction of buyers and sellers
determines prices.
Each price reflects the good’s value to buyers
and the cost of producing the good.
Prices guide self-interested households and
firms to make decisions that, in many cases,
maximize society’s economic well-being.
PRINCIPLE 6: Markets Are Usually A Good Way to Organize Economic Activity
“There ain’t no such thing as a free lunch.”
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.
PRINCIPLE 1: People Face Tradeoffs.
Important role for govt: enforce property rights
(with police, courts)
People are less inclined to work, produce, invest,
or purchase if large risk of their property being
stolen.
PRINCIPLE 7: Governments Can Sometimes
Improve Market Outcomes
Govt may alter market outcome to
promote equity.
If the market’s distribution of economic well-being
is not desirable, tax or welfare policies can
change how the economic “pie” is divided.
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 most important determinant of living
standards: productivity, the amount of goods
and services produced per unit of labor.
Productivity depends on the equipment, skills,
and technology available to workers.
Other factors (e.g., labor unions, competition from
abroad) have far less impact on living standards.
PRINCIPLE 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services
Inflation: increases in the general level of prices.
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
the cost of any action is measured in terms of?
foregone opportunities
rational people make decisions by?
comparing marginal costs and marginal benefit
it is is the ultimate source of living
standards?
productivity
it is the ultimate source of inflation?
money growth
what are the two roles of the government?
- alter market outcome to promote equity
- can change how the economic “pie” is divided.
enumerate the principles of decision making
(principle 1-4)
enumerate the principles of interactions among people
(principle 5-7)
enumerate the principles of the economy as a whole
(principle 8-10)
