Seven Principles in Economics Flashcards
1
Q
What are the seven principles?
A
- People face trade-offs
- opportunity costs
- Thinking at the margin
- people responds to incentives
- trade can make everyone better off
- markets can be a good way to organize economic activity
- governments can sometimes improve market outcomes
2
Q
- People face trade-offs
1.
2.
3.
A
- to get one thing, you have to give up another
- making decisions required trading one goal against another (food-clothing)
- efficiency vs. equity
3
Q
Definiton of Efficiency
A
- how society gets the most it can from its scarce resources
4
Q
Definition of equity
A
- means the benefits of those resources are distributed fairly among the members of society
5
Q
- Opportunity costs
1.
2.
3.
4.
5.
A
- what you give up to obtain that item, a ratio expressed as the sacrifice in one good in terms of the gain in the other
- alternative cost
- the values (not benefit) of the choice in terms of the best alternative while making a decision
- weighing cost and benefit in as c-b-analysis
- exlplicit vs. implicit
6
Q
Explicit costs vs. implicit costs
A
cost that have direct monetary payment by producers
vs
o.c. that are not reflected in cash outlfow but implied by the failure of the firm to allocate its existing (owned) reources, or factors of production to the best alternative use
7
Q
- thinking at the margin
1.
2.
3.
4.
A
- to compare 2 or more alternatives, we identify all of the relevant costs and benefits, compute net nefeit for each option and then identify the alternatives with the highest benefit
- maximizing net benefit = optimizing
- marginal changes
- being rational is the assumption that decision makers can make consistent choices between alternatives
8
Q
What are marginal changes?
A
- small, incremental adjustments to an existing plan of action
9
Q
Thinking at the margin - equilibrium
1.
2.
A
- a situation when no one benefits by changing his / her behaviour
- the idea that an economy consists of an aggregation of many such agents who are simultaneously optimizing
10
Q
- People respond to incentives
Assuming rational people make rational decisions, then…
1.
2.
3.
A
- marginal changes in costs or benefits motivate people to respond
- the decision to choose one alternative over another occurs when that alternatives marginal benefits exceed its marginal costs!
- public policies can create incentives or disincentives that alter behaviour
- sometimes policy makers fail to understand how policies alter incentives and behaviour
11
Q
- Trade can make everyone better off
1.
2.
3.
4.
5.
A
- people gain from ability to trade with one another
- win win situation, not a zero sum game
- division of labor allows people to specialize in what they do best
- enables greater variety of goods, and goods at lower costs
- society as a whole benefits, but sometimes not every single individual (e.g.people loosing jobs as production moves overseas)
12
Q
- Markets can be a good way to organize economic activity
1.
2.
A
- pure market economy has no government intervention - it allocates resources through decentralized decisions of many firms as they interact in markets for goods and services
- markets prices reflect both the value of product to consumers and the cost of the resources used to produce it - therefore, decisions to buy or produce goods and services are made based on the cost to society of providing them
13
Q
- Governments can sometimes improve market outcomes
1.
2.
3.
A
- markets do not always lead to efficient or equitable outcomes
- market failure occurs when the market fails to allocate resources efficiently - when the market fails government can intervene to ptomote efficiency and equity
- exteranility and market power as causes of market failure
14
Q
Causes of market failure
1.
2.
A
Externality - the impact of one person or firm´s actions on the well-being of a bystander - also public goods
Market power- the ability of a single person or firm to unduly influence market prices
