Unit 1: Basic Economic Concepts Flashcards
The limited nature of society’s resources
Scarcity
The study of how society manages its scarce resources
Economics
The property of society getting the most it can from its scarce resources
Efficiency
The property of distributing economic prosperity fairly among the members of society
Equity
Whatever must be given up to obtain some item
Opportunity Cost
Some incremental adjustments to a plan of action
Marginal Changes
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
A situation in which a market left on its own fails to allocate resources efficiently
Market Failure
The impact of one person’s actions on the well-being of a bystander
Externality
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
Market Power
The quantity of goods and services produced from each hour of a worker’s time
Productivity
An increase in the overall level of prices in the economy
Inflation
A curve that shows the short-run trade off between inflation and unemployment
Phillips Curve
Fluctuations in economic activity, such as employment and production
Business Cycle
List and briefly explain the four principles of individual decision making
The fundamental lessons about individual decision-making are that people face tradeoffs among alternative goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benefits, and that people change their behavior in response to the incentives they face.
List and briefly explain the three principles concerning economic interactions
The fundamental lessons about interactions among people are that trade can be mutually beneficial, that markets are usually a good way of coordinating trade among people, and that the government can potentially improve market outcomes if there is some market failure or if the market outcome is inequitable.
List and briefly explain the three principles that describe how the economy as a whole works
The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards, that money growth is the ultimate source of inflation, and the society faces a short-run tradeoff between inflation and unemployment.
A visual model of the economy that shows how dollars flow through markets among households and firms
Circular-Flow Diagram
A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
Production Possibilities Frontier
The study of how households and firms make decisions and how they interact in markets
Microeconomics
The study of economy-wide phenomena, including inflation, unemployment, and economic growth
Macroeconomics
Claims that attempt to describe the world as it is
Positive Statements
Claims that attempt to prescribe how the world should be
Normative Statements
In what sense is economics like a science?
Economists try to address their subject with a scientists’ objectivity. Like all scientists, they make appropriate assumptions and build simplified models in order to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier.
What is the difference between positive statements and normative statements?
A positive statement is an assertion about how the world IS. A normative statement is an assertion about how the world OUGHT TO BE. When economists make normative statements, they are acting more as policy advisers than scientists.
Why might economic advisers to the president disagree about a question of policy?
Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values.
The comparison among producers of a good according to their productivity
Absolute Advantage
Whatever must be given up to obtain some item
Opportunity Cost
The comparison among producers of a good according to their opportunity cost
Comparative Advantage
Goods produced abroad and sold domestically
Imports
Goods produced domestically and sold abroad
Exports
Why is interdependence and trade desirable?
Each person consumes goods and services produced by many other people both in our country and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.
What two ways are their to compare the ability of two people in producing two goods?
The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing that good. The person who has the smaller opportunity cost of producing the good is said to have the comparative advantage.
What are the gains of trade based on?
The gains for grade are based on comparative advantage, not absolute advantage.
Why does trade make everyone better off?
Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage.
A group of buyers and sellers of a particular good or service
Market
A market in which there are many buyers and many sellers so that each has a negligible impact on the market price
Competitive Market
The amount of a good that buyers are willing and able to purchase
Quantity Demanded
The claim that, other things equal, the quantity demanded of a good galls when the price of the goods rises
Law of Demand
A table that shows the relationship between the price of a good and the quantity demanded
Demand Schedule
A graph of the relationship between the price of a good and the quantity demanded
Demand Curve
A good for which, other things equal, an increase in income leads to an increase in demand
Normal Good
A good for which, other things equal, an increase in income leads to a decrease in demand
Inferior Good
Two goods for which an increase in the price of one leads to an increase in the demand for the other
Substitutes
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Complements
What are the determinants of demand?
Income - normal good Income - inferior good Price - substitute Price - complement Change in taste Expectations - price of good Expectations - income level Market Size
