Week 1 Flashcards
Name the 11 Big Ideas according to the authors
- Incentives Matter
- Good Institutions Align Self-Interest with the Social Interest
- Trade-offs are Everywhere
- Thinking on the Margin
- The Power of Trade
- The Importance of Wealth and Economic Growth
- Institutions Matter
- Economic Booms and Busts cannot be avoided but can be moderated
- Prices Rise when the government prints too much money
- Central Banking is a hard job
- Economics is Fun
Define Incentives
Incentives are rewards and penalties that motivate behaviour
Name couple important Incentives
Fame, Power, Reputation, Sex and love
What happens when self-interest aligns with the broader public interest?
We get good outcomes
What happens according to Adam Smith when markets work well?
When markets work well, those who pursue their own interests end up promoting the social interest as if led by an “invisible hand”.
How can Governments help when markets don’t properly align self-interest with social interest?
The government can improve the situation by changing incentives with taxes, subsidies, or other regulations.@
Define a Trade-Off:
A trade-off can be described as a balance that is achieved between two desirable but incompatible features: a compromise.
Define ‘Thinking on the Margin’
Thinking on the margin is just making choices by thinking in terms of marginal benefits and marginal costs; the benefits and costs of a little but more (or little bit less)
What’s the real power of trade?
The real power of trade is the power to increase production through specialization.
Define economies of scale?
Costs are reduced because of mass production of goods
Describe the theory of comparative advantage:
The theory of comparative advantage says that when people or nations specialize in goods in which they have low opportunity costs, they an trade to mutually advance.
What must a country understand to become a wealthier country?
One has to understand economic growth, which is one of the most important tasks of economics.
Name some important institutions for supporting good incentives:
- Property rights
- political stability
- honest government
- a dependable legal system
What makes a country rich?
Wealthy countries have lots of physical and human capital per worker and they produce things in a relatively efficient manner, using the latest technological knowledge.
Define Inflation:
Inflation is an increase in the general level of prices and is one of the most common problems in macroeconomics
What are the three principal benefits of trade?
- Trade makes people better off when preferences differ.
- Trade increases productivity through specialization and the division of knowledge.
- Trade increases productivity through comparative advantage.
How does trade create value?
Trade creates value by moving goods from people who value them less to people who value them more.
Economic growth in the modern era is primarily due to the creation of…
…new knowledge
Define absolute advantage
The ability to produce the same good using fewer inputs than another producer
Define a production possibilities frontier (PPF)
A PPF shows all the combinations of goods that a country can produce given its productivity and supply of inputs. A PPF illustrates trade-offs
Define comparative advantage
A country has a comparative advantage in producing goods for which it has the lowest opportunity costs
The theory of comparative advantage explains trade patterns and tells us something remarkable: a country or person will always be…
…the low-cost seller of some good
What’s Adam Smith’s view on Trade?
People will never attempt to produce something at home that will cost them more than when they just buy it
Does everyone benefit from increased trade?
No:
Workers in the sector with increased demand will see their wages rise
Workers in the sector with decreased demand will see their wages fall.
Overall, however, trade increases total wealth
Define ‘opportunity cost’
The opportunity cost of a choice is the value of the opportunities lost
