The Principles Flashcards
1st Principle
Choices are necessary because resources are scarce
Define:
-Resource
-Scarce
- anything that can be used to produce something else
-a resource is scarce when there’s not enough of the resource available to satisfy all the various ways a society wants to use it
2nd Principle
The true cost of something is its opportunity cost
Define Opportunity Cost
What you must give up (forego) in order to get something
- when making a decision you may not only consider the monetary cost
3rd Principle
Trade-off?
How much is a decision at the margin
-comparison of the costs and the benefits of doing something
Explain Marginal Decision
Define Marginal analysis
a decision made at the margins of an activity about whether to do a bit more or a bit less of that activity
the study of marginal decisions
4th Principle
People respond to incentives (disincentives) exploiting opportunities to make themselves better off
Define Incentive
anything that offers rewards to people who change their behaviour
5th Principle
There are gains from trade, which arise from specialization
Define Specialization
The situation in which each person specializes in the task that they are good at performing
6th Principle
markets move toward equilibrium
-people respond to incentives and avoid harm (punishments), markets move toward equilibrium
Define Equilibrium
an economic situation in which no individual would be better off doing something different
7th Principle
Resources should be used efficiently to achieve society’s goals
How do you know if the economy is efficient
If it takes all opportunities to make some people/ organizations better off without making other people worse off
( use resources to produce optimally)
Define Equity
a condition in which everyone gets their fair share of
8th Principle
Markets usually lead to efficiency, but when they don’t government intervention can improve society’s welfare
people normally take opportunities to make themselves better off
Define Efficiency
all the opportunities to make people better off have been exploited
Explain Market Failure
the pursuit of self-interest makes society worse off
when markets don’t achieve efficiency, government can intervene to improve society’s welfare
9th Principle
One persons spending is another person’s income
during recessions a drop in business
-less income
-less spending
-increase in unemployment
10th Principle
Overall spending sometimes gets out of line with the economy’s productive capacity; when it does, government policy can change spending
What is Productive capacity?
the amount of goods and services the economy is capable of producing
What is Productive capacity?
the amount of goods and services the economy is capable of producing
What is Overall Spending
amount of goods and services that consumers and businesses want to buy
What happens if the overall spending doesn’t match the amount the economy is capable of producing?
when it falls short- economy experienced recession
when it outstrips the supply- the economy experience inflation
government policies can be used to address the imbalances (monetary policy, fiscal policy )
11th Principle
Increases in the economy’s potential, lead to economic growth over time
Define Economy’s Potential
the total amount of goods and services it can produce
Define Economic growth
the increase in living standards over time
Examples on how to boost economy’s potential
-emergence of new technologies
-skill development
-increase in resources available for production boost the economy’s potential
-> hence living standards improve
What does an increase in living standards mean?
they are usually unequally distributed among a country’s residents- creating winners and losers
e.g.
new source of energy= benefit economy and government= winners
reduced demand for coal= reduce income for mining companies= losers
Which principles are due to individual choices?
1-4
Which Principles are due to interaction of individual choices?
5-8
Which Principles are due to economy-wide interactions
9-11
