Topic 1: Intro to Economics Flashcards
A social science concerned with using scarce resources to obtain maximum satisfaction of the unlimited material wants of society (Walstad and Bingham).
Economics
The study of how societies use scarce resources to produce valuable commodities and distribute them among different people (Samuelson and Nordhaus).
Economics
A social science concerned with using scarce resources to obtain the maximum satisfaction of the unlimited material wants of society (McConnell and Brue).
Economics
The study of how people use their limited resources to try to satisfy unlimited wants (Parkin and Bade).
Economics
Why study Economics?
➢Economics is an integral part of our everyday life and it affects our daily life.
➢Understanding economics, human beings become better informed and better equipped to analyze the human behaviour.
➢Economics allows us to intelligently and confidently debate on government policies and consequences.
Social science studies the allocation of scarce resources to satisfy unlimited human wants.
Economics
Economics came from the Greek word ——
oikonomia
Oikonomia means
household management
It means making decisions about choices.
Allocation
It refers to a condition wherein most things that people want are available only in limited supply.
Scarcity
Common Elements of Economic Models
- Ceteris paribus assumption (other things being equal or constant).
- The assertion that economic agents are optimizers (they want to make the most of everything).
- The distinction between normative and positive economics.
• Positive economics – explanation of economic phenomena
• Normative economics – the application of positive economics to create policy
Ceteris paribus assumption
Other things being equal or constant
The assertion that economic agents are optimizers
They want to make the most of everything.
Explanation of economic phenomena
Positive Economics
The application of positive economics to create policy.
Normative economics
Types of Economic Resources
-Land
-Labor
-Capital
-Entrepreneurial Ability
One of the factors of production that include natural resources.
Land
Basic factor of production which are productive services embodied in human physical effort, skill, intellectual powers, and others.
Labor
Refers to durable goods to produce another goods. (buildings, plant and machinery, roads, computers, ships and many more)
Capital
The ability to use the three factors of production to produce the required goods and services.
Entrepreneurial Ability
2 Classifications of Economics
-Microeconomics
-Macroeconomics
The study of how individual consumers and firms behave, and how the market system allocates scarce resources. It does not concern itself to the temporary fluctuations in the economy.
Microeconomics
Studies the economy as a whole. It seeks to explain why fluctuations happen and then investigate policies that can mitigate them. It studies three essential phenomena of the economy: growth of output, employment, and inflation. All of which rely on the interactions of the goods, labor, and assets markets of the economy.
Macroeconomics
Studies the economy as a whole. It seeks to explain why fluctuations happen and then investigate policies that can mitigate them. It studies three essential phenomena of the economy: growth of output, employment, and inflation. All of which rely on the interactions of the goods, labor, and assets markets of the economy.
Macroeconomics
8 Economic Goals
-Economic Growth
-Full employment
-Economic Efficiency
-Price level stability
-Economic Freedom
-An equitable distribution of income
-Economic Security
-Balance of trade
High standard of living translated which is translated into the production of more and better quality of goods and services.
Economic Growth
There must be an available job for individuals who are willing and able to work.
Full Employment
Makes use of the resources to maximize the benefit for the society.
Economic Efficiency
It able to avoid huge price fluctuation.
Price level stability
Freedom to do what economic activity to do.
Economic Freedom
How people make decisions.
• People face tradeoffs.
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.
How people interact with each other.
• Trade can make everyone better off.
• Markets are usually a good way to organize economic activity.
• Governments can sometimes improve economic outcomes.
The forces and trends that affect how the economy as a whole works.
• The standard of living depends on a country’s production.
• Prices rise when the government prints too much money.
• Society faces a short-run tradeoff between inflation and unemployment.
The standard of living depends on
Country’s production
Prices rise when
The government prints too much money
Society faces a short-run tradeoff between
Inflation and Unemployment
The cost of something is
What you give up to get it
Rational people think
At the margin
People respond to
Incentives
People face
Tradeoffs
It can make everyone better off.
Trade
Usually a good way to organize economic activity.
Markets
—— can sometimes improve economic outcomes
Governments
Ten Principles of Economics
- People Face Tradeoffs
- The Cost of Something Is What You Give Up to Get It
- Rational People Think at the Margin
- People Respond to Incentives
- Trade Can Make Everyone Better Off
- Markets Are Usually a Good Way to Organize Economic Activity
- Governments Can Sometimes Improve Market Outcomes
- The Standard of Living
Depends on a Country’s Production - Prices Rise When the Government Prints Too Much Money
- Society Faces a Short-run Tradeoff Between Inflation and Unemployment.
Principle: To get one thing, we usually have to give up another thing.
Food v. clothing
Leisure time v. work
Sleeping v. attending school
Efficiency v. equity
People Face Tradeoffs
It means society gets the most that it can from its scarce resources.
Efficiency
It means the benefits of those resources are distributed fairly among the members of society.
Equity
Principle: Decisions require comparing costs and benefits of alternatives.
Whether to go to college or to work?
Whether to study or go out on a date?
Whether to go to class or sleep in?
The Cost of Something Is What You Give Up to Get It.
The __________ of an item is what you give up to obtain that item.
Opportunity Cost
Principle: Making decisions requires trading off one goal against another.
People Face Tradeoffs
____________ are small, incremental adjustments to an existing plan of action.
Marginal Changes
Principle: People make decisions by comparing costs and benefits at the margin.
Rational People Think at the Margin.
Principle: Marginal changes in costs or benefits motivate people to respond.
People Respond to Incentives
Principle: The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs!
People Respond to Incentives
Principle: People gain from their ability to trade with one another.
Trade Can Make Everyone Better Off
Principle: Competition results in gains from trading. Trade allows people to specialize in what they do best.
Trade Can Make Everyone Better Off
A _____________ is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Market Economy
Principle: Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.”
Markets Are Usually a Good Way to Organize Economic Activity
Principle: Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions. As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole.
Markets Are Usually a Good Way to Organize Economic Activity
______ occurs when the market fails to allocate resources efficiently.
Market Failure
Principle: When the market fails (breaks down) government can intervene to promote efficiency and equity.
Governments Can Sometimes Improve Market Outcomes
Standard of living may be measured in different ways:
-By comparing personal incomes.
-By comparing the total market value of a nation’s production.
Market failure may be caused by an _________ which is the impact of one person or firm’s actions on the well-being of a bystander.
Externality
Market failure may be caused by__________ which is the ability of a single person or firm to unduly influence market prices.
Market Power
Principle: Almost all variations in living standards are explained by differences in countries’ productivities.
The Standard of Living Depends on a Country’s Production.
Principle: One cause of inflation is the growth in the quantity of money. When the government creates large quantities of money, the value of the money falls.
Prices Rise When the Government Prints Too Much Money
________ is an increase in the overall level of prices in the economy.
Inflation
The _________ is an economic theory that inflation and unemployment have a stable and inverse relationship.
Phillips curve
___________ is the amount of goods and services produced from each hour of a worker’s time.
Productivity
Principle: The inflation in the economy and the unemployment rate faces a trade-off over the short-run period as discussed by the SRPC (short-run Phillips curve). According to SPRC, when the inflation in the economy increases, it experiences a decline in the unemployment rate, and when the unemployment rate increases, the economy experiences a decrease in the inflation rate.
Society Faces a Short-run Tradeoff Between Inflation and Unemployment
When individuals make decisions, they face ________ among alternative goals.
Tradeoffs
Rational people make decisions by comparing
Marginal costs and marginal benefits
People change their behavior in response to the ________ they face.
Incentives
_______ can be mutually beneficial
Trade
_________ are usually a good way of coordinating trade among people
Markets
It can potentially improve market outcomes if there is some market failure or if the market outcome is inequitable.
Government
The ultimate source of living standards
Productivity
The ultimate source of inflation
Money Growth
3 Essential Phenomena of the Economy
Output
Employment
Inflation
3 Essential Phenomena of the Economy
Output
Employment
Inflation
