Macro Quiz 1 Flashcards
Scarcity
society has limited resources, and, therefore, cannot produce all the goods and services people want
Economics
study of how society manages its scare resources
How many principles of economics?
ten principles
Principle 1
people face trade-offs, “no such thing as free lunch”
Example of classic trade-off
“guns and butter”, the more a society spends on the military, the less it can spend on consumer goods
Efficiency
society is getting the greatest benefits from its scarce resources
Equality
those benefits are distributed uniformly among society’s members
Principle 2
the cost of something is what you give up to get it
Opportunity cost
what you give up to get an item
Principle 3
Rational people think at the margin
Rational people
systematically and purposefully do the best they can to achieve their goals, given the available opportunities
Marginal change
incremental adjustment to an existing plan of action
Margin
“edge” so marginal changes are small adjustments around the edges of what you are doing. rational people make decisions by comparing marginal benefits and marginal costs
Principle 4
people respond to incentives
Incentive
something that induces a person to act, such as the prospect of a punishment or reward
Principle 5
trade can make everyone better off
Principle 6
markets are usually a good way to organize economic activity
Market economy
decisions of a central planner are replaced by those of millions of firms and households
Invisible hand
sellers look at the price when deciding how much to supply, and buyers look at the price when deciding how much to demand
Principle 7
governments can sometimes improve market outcomes
Property rights
individuals can own and control scarce resources
Market failure
situation in which the market does not produce an efficient allocation of resources on its own
Externality
impact of one person’s actions on the well-being of a bystander
Market power
refers to the ability of a single person or firm to unduly influence market prices
Productivity
amount of goods and services produced by each unit of labor
Principle 9
prices rise when the government prints too much money
Inflation
increase of overall level of prices in the economy
Principle 10
society faces a short-run trade-off between inflation and unemployment
Short-run effects of money growth
-stimulates overall level of spending and thus the demand for goods and services
-higher demand will, overtime, cause firms to raise their prices, but in the meantime, it encourages them to hire more workers and produce a larger quantity of goods/services
-more hiring means lower employment
business cycle
irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed
Purpose of graphs
offer visual way to express idea that might be less clear if described with equations or words, provide powerful way of finding and interpreting patterns
Supply and demand
forces that make market economies work, determining the quantity of each good produced and the price at which it is sold
Market
group of buyers and sellers of a good or service. Buyers determine the demand for the product, and the sellers determine the supply of the product
Competitive market
describe a market in which there are so many buyers and sellers that each has little effect on the market price
Perfectly competitive
goods offered for sale are all exactly the same, and buyers/sellers are so numerous that no single buyer has any influence over the market price
Price takers
since perfectly competitive, markets must accept the price the market determines
Monopoly
markets with only one seller and they set the price
Demand curve
relationship between price and the quantity demanded
Quantity demanded
amount that buyers are willing and able to purchase
Law of demand
other things being equal, when the price of a god rises, the quantity demand falls, and when the price falls, the quantity demanded rises
Market demand
sum of all the individual demands for a particular good or service
Normal good
demand for something falls when income falls
Inferior good
demand for something rises when income falls
Substitutes
when a fall in price of one good, reduces the demand for another good
Complements
when a fall in the price of one good, raises the demand for another good
Other shifts in demand curve
tastes, expectations, number of buyers
Supply curve
relationship between price and quantity supplied
Quantity supplied
amount that sellers are willing and able to sell
Law of supply
relationship between price and the quantity supplied
Shifts in supply curve
input prices, technology, expectations, number of sellers
Equilibrium
quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell
Surplus
excess supply, producers are unable to sell all they want at the going price
Shortage
excess demand, consumers are unable to buy all they want at the going price
Law of supply and demand
price of any good adjusts to bring the quantity supplied and the quantity demanded into balance
