week 1 (chapter 1, chapter 2) Flashcards
society
decisions of firms and how they are made
economic agents
how decisions are made throughout society and how agents make these decisions
households
decisions of individuals, and how they are made
economics
the study of how society manages its scarce resources
scarcity
the limited nature of societys resources
microeconomics
the study of how households and firms
1. make decisions
2. interact in markets
macroeconomics
the study of the economy on a whole
economics
how people make decisions and the forces and trends that affect the economy as a whole
incentives
something that induces a person to act, i.e. the prospect of a reward or punishment
what do rational people respond to?
incentives
- self interest is an important incentive
market
a group of buyers and sellers
market economy
system that allocates resources through decentralized decisions of many households and firms as they interact in markets
what is the invisible hand?
prices guide self interested households and firms to make decisions, that maximize society’s economic well being
corollary
government intervention
- prevents the invisible hand’s ability to coordinate the decisions of the households and firms that make up the economy
efficiency
when society gets the most from its scarce resources
- we tend to squeeze the most out of our resources than is optimal for the future
equality
when prosperity is distributed uniformly among society’s members
tradeoff
comparing the costs and benefits of alternative choices
opportunity cost
whatever must be given up to obtain any item
rational people
systematically and purposefully do the best they can to achieve their objectives
- take action if the marginal benefit outweighs the marginal cost
marginal benefit
what is the gain that you would make if you spent an additional dollar
- how much more of a benefit would you obtain?
marginal cost
what is the cost that i would gain if you spent an additional dollar
- how much more of a cost would you obtain?
productivity
the amount of goods and services produced per unit of labor
- depends on the equipment, skills, and technology available to workers
market failure
when the market fails to allocate society’s resources efficiently
causes of market failure
externalities
market power
externalities
when the production or consumption of a good affects bystanders (e.g.) pollution
market power
a single buyer or seller has substantial influence on market price (e.g. monopoly)
fiscal policy
the use of government revenue collection (taxation) and expenditure (spending) to influence the economy
- done to smooth out downturn
monetary policy
the process by which the government controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability
inflation
increase in the general level of prices
production possibility frontier
shows how the combinations of two goods the economy can possibly produce, given available resources and available technology
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
- using the gradient of the PPF (slope) tells you how much of one thing you are giving up to produce another
what can shift a PPF
improvements in technology, increase in number of laborers, new forced migration, relaxed immigration laws, etc.
why can the PPF be bow shaped
not every worker produces both goods at the same rate
positive statements
describes a relationship, could use data to confirm or refute
ex. the government should print less money
normative statements
value judgement that cannot be confirmed or refuted
ex. an increase in the price of burritos will cause an increase in consumer demand for music downloads
