Principles of Economics Flashcards
What is Principle 1?
People Face Trade Offs
A concept that states that society has limited resources and therefore cannot produce all the goods and services people wish to have.
Scarcity
The study of how society manages its scarce resources
Economics
What is a classic trade-off where the society weighs its expenditure on national defense and consumer goods?
“Guns and Butter”
Laws that require firms to reduce pollution that raise costs of producing goods and services is an example of a trade-off on?
Clean environment and high level of income
It means that society is getting the maximum benefits from its scarce resources.
Efficiency
It means that benefits are distributed uniformly among society’s members.
Equality
What is Principle 2?
The cost of Something is What you Give Up to Get It
Because people face trade-offs, making decisions requires comparing Blank and Blank of alternative courses of actions
Costs and Benefits
An item that you give up to get another item.
Opportunity Cost
What is Principle 3?
Rational People Think at the Margin
People who systematically and purposefully do the best that they can to achieve their objectives
Rational People
Economists use this term to describe a small incremental adjustment to an existing plan of action
Marginal Change
What is Principle 4?
People respond to incentives
Something that induces a person to act
Incentive
A tax on gasoline is an example of?
Incentive
Principles under How People Make Decisions
- 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
Principles under How People Interact
- Trade can Make everyone Better Off
- Markets are usually a good way to organize economic activity
- Governments can sometimes improve market outcomes
Allows each person to specialize in the activities he or she does best.
Trade
What is Principle 5?
Trade can Make everyone Better Off
What is Principle 6?
Markets are usually a good way to organize economic activity
An economy that allocates resources through decentralized decisions of many firms and households as they interact in market for goods and services
Market Economy
According to Adam Smith, Households and Firms are guided by an?
Invisible Hand
Prevents prices from adjusting naturally to supply and demand
Government
Impedes the invisible hand’s ability to coordinate the decisions of the households and firms that make up an economy.
Government
The ability of an individual to own and exercise control over scarce resources
Property Rights
What is Principle 7?
Governments can sometimes improve market outcomes
Broad reasons for the government to interfere in the economy
to promote efficiency or to promote equality
A situation in which a market left on its own fails to allocate resources efficiently
Market failure
One possible cause of market failure
Externality
The impact of one person’s actions on the well-being of a bystander
Externality
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
Market Power
Principles under How the Economy as a Whole Works
- 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 a Short-run trade-off between Inflation and Unemployment
What principle states that almost all variation in living standards is attributable to differences in countries’ productivity?
A country’s standard of living depends on its ability to produce goods and services
The quantity of goods and services produced from each unit of labor
Productivity
To boost living standards, policymakers need to?
raise productivity by ensuring that workers are well educated, have the tools they need, and have access to the best technology.
An increase in the overall level of prices in the economy
Inflation
What causes inflation?
Growth in the quantity of money
What does increasing the amount of money stimulate?
Overall level of spending and the demand for goods and services
Higher demand causes firms to?
Raise their prices, hire more workers, and produce alarge quantity of goods and services
More hiring entails
Lower unemployment
The irregular and ;largely unpredictable fluctuations in economic activity, such as employment and production
Business Cycle
