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Intro Micro > Part 1 [Introduction] - 1.ten principles of economics - 2.thinking like an economist - 3.interdependence and the gains from trade > Flashcards

Part 1 [Introduction] - 1.ten principles of economics - 2.thinking like an economist - 3.interdependence and the gains from trade Flashcards

1
Q

How are households and economies similar?

A

They both face many of the same decisions regarding what tasks/jobs need to be done, which members of the household/society will do which task/job and what each member gets in return.

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2
Q

What is scarcity?

A

The limited nature of society’s resources

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3
Q

What is economics?

A

The study of how society manages its scarce resources.

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4
Q

What are the four economic principles regarding how people make decisions?

A
  1. People face tradeoffs
  2. The cost of something is what you give up to get it
  3. Rational people think at the margin
  4. People respond to incentives.
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5
Q

What are 5 good examples of tradeoffs?

A
  1. Time (How it is spent)
  2. Money (How it is spent)

Between:

  1. Guns & Butter
  2. Clean Environment & High Income
  3. Efficiency & Equity
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6
Q

What is efficiency in economics?

A

The property of society getting the most it can from its scarce resources

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7
Q

What is equity in economics?

A

The property of distributing economic prosperity fairly among the members of society.

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8
Q

What is a direct result of scarcity?

A

Because people face tradeoffs, making decisions requires comparing the costs and benefits of alternative courses of action.

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9
Q

What is an opportunity cost?

A

Whatever must be given up to obtain some item.

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10
Q

Describe rational people.

A

Rational people systematically and purposefully do the best they can to achieve their objectives, given the opportunities they have.

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11
Q

What are marginal changes?

A

Small incremental adjustments to a plan of action.

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12
Q

When does a rational decision maker take action?

A

Only when the marginal benefits of the action exceed its marginal cost.

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13
Q

What is an incentive?

A

Something (such as the prospect of a punishment or a reward) that induces a person to act.

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14
Q

Why should policymakers never forget about incentives?

A

Because many policies change the costs or benefits that people face and, therefore, alter behaviour.

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15
Q

Describe how regulation requiring seat-belt use can produce unwanted incentives.

A

When deciding how safely to drive, rational people compare the marginal benefit from safer driving to the marginal cost. People respond to seat-belts as they would to an improvement in road conditions - by faster and less careful driving. The end result of a seat-belt law is a larger number of accidents.

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16
Q

What are the three economic principles regarding how people interact with one another?

A
  1. Trade can make everyone better off
  2. Markets are usually a good way to organize economic activity.
  3. Governments can sometimes improve market outcomes.
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17
Q

How can trade make everyone better off?

A

Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods and services at lower costs. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.

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18
Q

What is a market economy?

A

An economy that allocates resources through the decentralized decision of many firms and households as they interact in markets for goods and services.

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19
Q

What is it that acts as an invisible hand to promote overall economic well-being?

A

Prices. Prices adjust to guide buyers and sellers to reach outcomes that, in many cases, maximize the welfare of society as a whole. Market prices reflect both the value of a good to society and the cost of making the good.

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20
Q

What is the government’s most important responsibility in a market economy?

A

To enforce property rights.

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21
Q

What are two broad reasons for a government to intervene in a market?

A

To promote efficiency and to promote equity.

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22
Q

When can well-designed public policies enhance economic efficiency?

A

In the presence of either Market Failure or Market Power.

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23
Q

What is market failure?

A

A situation in which a market, left on its own fails to allocate resources efficiently.

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24
Q

What can cause market failures?

A

Externalities

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25
Q

What is an externality?

A

The impact of one person’s actions on the well-being of a bystander.

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26
Q

What is market power?

A

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

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27
Q

What are some public policies which aim to achieve a more equitable distribution of economic well-being?

A

The income tax and welfare systems.

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28
Q

What are the three economic principles regarding how the economy as a whole works?

A
  1. A country’s standard of living depends on its ability to produce goods and services.
  2. Prices rise when the government prints too much money.
  3. Society faces a short-run tradeoff between inflation and unemployment.
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29
Q

What can be attributed to almost all variations in living standards?

A

Differences in Productivity.

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30
Q

What is Productivity?

A

The quantity of goods and services produced from each hour of a worker’s time.

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31
Q

What determines the growth rate of a nation’s average income?

A

The growth rate of a nation’s productivity.

32
Q

How should makers of public policy address the relationship between productivity and living standards?

A

When thinking about how any policy will affect living standards, the key question is how will it affect our ability to produce goods and services.

33
Q

How do policymakers try to boost the standard of living by boosting productivity?

A

Ensuring that workers are well educated, have the tools needed to produce goods and services, and have access to the best available technology.

34
Q

What is inflation?

A

An increase in the overall level of prices in the economy.

35
Q

Why is keeping inflation at a low level a goal of economic policymakers around the world>

A

Because high inflation imposes various costs on society.

36
Q

What causes inflation?

A

The growth in the quantity of money. When a government creates large quantities of money, the value of the money falls.

37
Q

How does the short-run tradeoff between inflation and unemployment work?

A

Increasing the amount of money stimulates overall spending increasing demand for goods.
Higher demand leads to more production.
More workers are hired and unemployment falls.

38
Q

What does the short-run tradeoff between inflation and unemployment play a key role in?

A

In the analysis of the business cycle.

39
Q

What is the Business cycle?

A

Fluctuations in economic activity, such as employment and production.

40
Q

Which policy instruments help policymakers influence the combination of inflation and unemployment that the economy experiences?

A

By changing the amount the government spends, the amount it taxes, and the amount of money it prints.

41
Q

How do economists try to address their subject with a scientist’s objectivity?

A

They devise theories, collect data, and then analyze these data in an attempt to verify or refute theories.

42
Q

Why are past economic episodes valuable to study as an economist?

A

Because they give us insight into the economy of the past and, more important, because they allow us to illustrate and evaluate economic theories of the present.

43
Q

Why do economists make assumptions and build models which may not be precise or accurate?

A

All models, and their accompanying assumptions, simplify reality in order to improve our understanding of it.

44
Q

What two situations might call for differing assumptions in economic analysis?

A

Short-run and Long-run changes.

45
Q

What two models are of special importance for a thorough understanding of economics?

A

The Circular Flow Diagram

The Production Possibilities Frontier

46
Q

What is the circular flow diagram?

A

A visual model of the economy that shows how dollars flow through markets among households and firms

47
Q

What a main simplifications of the circular flow diagram?

A

The economy includes only two types of decision makers - Households & Firms

48
Q

What are the inputs firms us to produce goods and services called, what are they specifically, and who do they belong to?

A

Factors of Production - Labour, Land (natural resources), and capital (buildings & machines) - belong to households.

49
Q

Who are the buyers and who the sellers in a market for goods and services?

A

Households are buyers.

Firms are sellers.

50
Q

Who are the buyers and who the sellers in a market for factors of production?

A

Firms are buyers.

Households are sellers.

51
Q

How do goods, services, and factors of production flow through the economy using the circular flow diagram?

A

Factors of production flow from households to firms, and goods and services flow from firms to households.

52
Q

How does money flow through the economy using the circular flow diagram?

A

Spending on goods and services flows from households to firms, and income, in the form of wages, rent, and profit, flows from firms to households.

53
Q

What is the production possibilities frontier?

A

A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available technology.

54
Q

What do the two endpoints of a ppf represent?

A

These represent the extreme possibilities of producing only one of the two goods.

55
Q

Where on a ppf can an economy produce?

A

The economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier.

56
Q

When is an outcome said to be efficient and what does this correspond to on a ppf?

A

An outcome is efficient if the economy is getting all it can from its resources. The point would be on (rather than inside) the ppf.

57
Q

How does a ppf illustrate tradeoffs?

A

The PPF shows the opportunity cost of one good as measured in terms of the other good.

58
Q

How is the opportunity cost illustrated on a ppf?

A

The opportunity cost of what is on the x-axis equals the slope of the ppf.

59
Q

When considering the opportunity cost of a good on the x-axis, how does its marginal opportunity cost change throughout the ppf?

A

Because the ppf is bowed outward, the opportunity cost increases as more x-axis items are produced. The slope starts out flatter (low opportunity cost) and gets steeper (high opportunity cost) the more to the right you go.

60
Q

What happens to the ppf if more of one of the two goods can be produced than before, keeping the other one constant?

A

One endpoint stays the same, but the rest of the ppf shifts outward (with a new higher other endpoint).

61
Q

What is microeconomics?

A

The study of how households and firms make decisions and how they interact in markets.

62
Q

What is macroeconomics?

A

The study of economy-wide phenomena, including inflation, unemployment, and economic growth.

63
Q

What is a positive statement?

A

Claims that attempt to describe the world as it is.

64
Q

What is a normative statement?

A

Claims that attempt to describe how the world should be.

65
Q

What are the two main reasons economists may disagree?

A
  • They may disagree about the validity of alternative positive theories about how the world works.
  • They may have different values and, therefore, different normative views about what policy should try to accomplish.
66
Q

What is an absolute advantage?

A

The comparison among producers of a good according to their productivity (smaller quantity of inputs to produce a good).

67
Q

What is a comparative advantage?

A

The comparison among producers of a good according to their opportunity cost.

68
Q

When does a producer have a comparative advantage?

A

The producer who gives up less of other goods to produce good X has the smaller opportunity cost of producing good X and is said to have a comparative advantage in producing it.

69
Q

Why is it impossible for one producer to have a comparative advantage in both goods?

A

Because the opportunity cost of one good is the inverse of the opportunity cost of the other, if a person’s opportunity cost of one good is relatively high, his opportunity cost of the other good must be relatively low.

70
Q

In what situation would neither producer have a comparative advantage, at which point trade becomes useless?

A

When two producers have the exact same opportunity cost.

71
Q

What are gains from specialization and trade based on? What happens to the economy?

A

Gains are based on comparative advantage. Total production in the economy rises.

72
Q

What is another way to look at the gains from trade?

A

In terms of the price that each party pays the other (which should be lower than their current opportunity costs).

73
Q

What needs to happen for both parties to gain from trade?

A

The price at which they trade must lie between the two opportunity costs,

74
Q

What is an Import?

A

Goods and services produced abroad and sold domestically.

75
Q

What is an Export?

A

Goods and services produced domestically and sold abroad.

76
Q

What does the principle of comparative advantage state about trade between two countries?

A

Each good should be produced by the country that has the smaller opportunity cost.

Intro Micro (7 decks)

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