Section 1 - Ch. 1-3 Flashcards
Core Principles
1 Scarcity (“No-Free-Lunch”) 2. Cost-Benefit 3. Incentive 4. Comparative Advantage 5. Increasing Opportunity Cost (“ Low- Hanging-Fruit”) 6. Efficiency 7. Equilibrium (“No Cash on the Table”)
economics
the study of how people make choices under conditions of scarcity and of the results of those choices for society
Scarcity Principle
“No-Free-Lunch”
Although we have boundless needs and wants,the resources available to us are limited. So having more of one good thing usually means having less of another.
Cost-Benefit Principle
An individual (or a firm or a society) should take an action if,and only if,the extra benefits from taking the action are at least as great as the extra costs.
Incentive Principle
economic naturalism, if you want to predict people’s behavior, a good place to start is by examining their incentives
Action is more likely to be taken if the benefit rises and less likely to be taken if the cost rises. This principle examines people’s incentives to predict their behavior.
Comparative Advantage
when two people (or two nations) have different opportunity costs of performing various tasks, they can always increase the total value of available goods and services by trading with one another
Everyone does best when each concentrates on the activities for which their opportunity cost is lowest. (The total value of output increases with specialization and trade.)
Increasing Opportunity Cost
“Low-Hanging-Fruit”
In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.
Efficiency Principle
when the economics pie grows larger, everyone can have a larger slice than before
Equilibrium Principle
“No Cash on the Table”
a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action
rational person
people who systematically a purposefully do the best they can to achieve their objectives, given the available opportunities
economic surplus
the economic surplus from taking any action is the benefit of taking that action minus its cost
opportunity cost
the value of what must be forgone in order to undertake the activity
marginal cost
the increase in total cost that results fromcarrying out one additional unitof an activity
marginal benefit
the increase in total benefit that results from carrying out one additional unit of an activity
time going to school
the largest opportunity cost
equality
the property of distributing economic prosperity uniformly among the members of society
efficiency
the property of society getting the most it can from its scarce resources
the size of the economic pie
efficiency
how the economic pie is divided into individual slices
equality
Greater equality =
reduced efficiency
marginal change
a small incremental adjustment to an existing plan of action
incentive
something that induces a person to act
higher price in a market
incentive for buyers to consume less and sellers to produce more
how a market economy allocates scarce resources
the influence of prices on the behavior of consumers and producers
market economy
the decisions of a central planner are replaced by the decisions of millions of firms and households, an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Adam Smith’s observation
Households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes
prices
the instrument with which the invisible hand directs economic activity
reason gov’t is needed
the invisible hand can work its magic only if the gov’t enforces the rules and maintains the institutions that are key to a market economy
property rights
the ability of an individual to own and exercise control over scarce resources
business cycle
fluctuations in economic activity, such as employment and production
externality
the uncompensated impact of one person’s actions on the well-being of a bystander
inflation
an increase in the overall level of prices in the economy
market failure
a situation in which a market left on its own fails to allocate resources efficiently
market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
productivity
the quantity of goods and services produced from each unit of labor input
circular-flow diagram
a visual model of the economy that shows how dollars flow through markets among households and firms
