Quiz 1 Flashcards
First Principle of Economics
People face trade-offs
Second Principle of Economics
Cost of something is what you give up to get it
Third Principle of Economics
Rational people think on the margin (marginal benefits vs marginal costs)
Fourth Principle of Economics
People respond to incentives
Fifth Principle of Economics
Trade can make people better off
Sixth Principle of Economics
Markets are usually a good (the best) way to organize economic activity
Seventh Principle of Economics
Sometimes government can improve the market outcome
Eighth Principle of Economics
The wealth of a nation depends on the productivity of its labor
Ninth Principle of Economics
If a government prints too much money, there will be inflation
Tenth Principle of Economics
There is a short-run tradeoff between inflation and unemployment
Three questions of economic activity
What will we produce?
How will we produce?
For whom will the goods and services be produced?
Market Failures
Externalities, monopolies, public goods, common goods.
Externalities
a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved, such as the pollination of surrounding crops by bees kept for honey.
Hypothesis:
a deductive consequence of assumptions and initial conditions. Written as and If then, statement.
Inductive logic:
Make Specific observations and then generalize it.
Deductive logic:
Start with a general law/principle and apply it to a specific case
Empirical:
based on or verifiable by observation
Positive economics
Economic science, outcome of the scientific method.
Normative economics
Economic policy
Scientific method step 1
Choose assumptions and initial conditions
Scientific method step 2
Using deductive logic only, derive testable hypothesis about the world.
Scientific method step 3
Test the hypothesis using empirical data
Scientific method step 4
Either reject hypothesis or fail to reject it.
Scientific method step 5
If, after repeated testing, we always fail to reject the hypothesis, then we tentatively accept it as a law
Law of demand:
in the market, if the price falls, the quantity demanded increases
Impact the Quantity demanded
price
Impact the change in Demands
Income, price of substitutes, price of comp goods, tastes, expectations, # of buyers
Exchange:
No exchange:
Trade;
Can’t buy anything from anyone else
Scarcity
Quantity demand is greater than quantity supply at price 0.
CPF
Consumptions Possibilities Frontier
Autarky
No trade
TOT
Terms of Trade
Marginal Rate of Transformation
How many palm leaves you give up for one coconut
Adam Smith
Absolute Advantage
David Ricardo
Comparative advantage
Trade w/o specialization
gain
trade with specialization
Gain more
Specialize w/o trade
Cannot gain
