Ch. 1 Flashcards
(19 cards)
What is scarcity?
the limited nature of society’s resources
What is economics?
the study of how society manages its scarce resources
What is the first principle of economics?
People face trade-offs
Tells us what choices we have but not which to choose, for example, an individual choice is like do I want to see an action or comedy movie. Does the government want to tax polluting firms of give them subsidies? Another in society is between efficiency and equality.
What is micro vs. macroeconomics?
macro is about the economy-wide trends and patterns, while micro is about the specific actions and decisions within the economy
Describe efficiency and equality.
Efficiency: the property of society getting the most it can from its scarce resources
Equality: the property of distributing economic prosperity uniformly among members of society
These often conflict when government policies ae designed, as some policies that achieve greater equality reduce efficiency and vice versa.
What is the second principle of economics?
Opportunity Cost: The cost of something is what you give up to get it
Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action. The opportunity cost of an item is what you give up to get that item. When making any decision, decision makers should be aware of the opportunity costs that accompany each possible action.
What is the third principle of economics?
Rational people think at the margin
Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. Rational people know that decisions in life are rarely black and white but usually involve shades of gray. Economists use the term marginal change to describe small incremental adjustment to an existing plan of action. Keep in mind that margin means “edge,” so marginal changes are adjustments around the edges of what you are doing. Rational people often make decisions by comparing marginal benefits and marginal costs.
EX: Imagine that a plane is about to take off with 10 empty seats and a standby passenger waiting at the gate whose willing to pay $300 for a seat. Should the airline sell the ticket? Yes, since the cost of adding one more passenger is tiny. The average cost of flying a passenger is $500, but the marginal cost is merely the cost of a can of soda that the extra passenger will consume. As long as the standby passenger pays more than the marginal cost, selling the ticket is profitable.
A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost.
What is the fourth principal of economics?
People respond to incentives
An incentive is something (such as the prospect of a punishment or reward) that induces a person to act. Because rational people make decisions by comparing costs and benefits, they respond to incentives.
What is the fifth principle of economics?
Trade can make everyone better off
Countries benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. The Chinese, as well as the French, Egyptians, and Brazilians, are as much our partners in the world economy as they are our competitors.
What is the sixth principle of economics?
Markets are usually a good way to organize economic activity
Most countries that once had centrally planned economies (basically only the government could organize economic activity in a way that promoted economic well-being for the country as a whole) have abandoned the system and are instead developing market economies. In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes. These firms and households interact in the marketplace, where prices and self-interest guide their decisions.
What is a market economy?
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
What is the seventh principle of economics?
Governments an sometimes improve market outcomes
One reason we need the government is that the invisible hand of the market fan work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. Most important, market economies need institutions to enforce property rights so individuals can own and control scarce resources. Another reason for the government to intervene in the economy and change the allocation of resources are to promote efficiency or promote equality. That is, most policies aim either to enlarge the economic pie or change how the pie is divided.
What is market failure?
a situation in which the market on its own fails to produce an efficient allocation of resources
What are two possible causes of market failure?
1) an externality: which is the impact of one person’s actions on the well-being of a bystander. The classic example is pollution. When the production of a good pollutes the air and creates health problems for those who live near the factories, the market left to its own devices may fail to take this cost into account.
2) Market power, which refers to the ability of a single person or firm (or small group) to unduly influence market prices. For example, if everyone in town needs water but there is only one well, the owner of the well is not subject to the rigorous competition with which the invisible hand normally keeps self-interest in check; she may take advantage if this opportunity by restricting the output of water so she can charge a higher price.
In the presence of externalities or market power, well-designed public policy can enhance economic efficiency.
What is the eighth principle of economics?
A country’s standard of living depends on its ability to produce goods and services
Almost all variation in living standards is attributable to differences in countries’ productivity – that is, the amount of goods and services produced by each unit of labor input. Similarly, the growth rate of a nation’s productivity determines the growth rate of its average income.
Define productivity.
the quantity of goods and services produced from each unit of labor input
Define inflation.
an increase in the overall level of prices in the economy
What is the ninth principle of economics
Prices rise when the government prints too much money (inflation)
What is the tenth principle of economics?
Society faces a short-run trade-off between inflation and unemployment
Although a higher level of prices is, in the long run, the primary effect of increasing the quantity of money, the short-run story is more complex and controversial. Most economists describe the short-run effects of monetary injection as follows:
- Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services.
- Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services
- More hiring means lower unemployment.
This line of reasoning leads to one final economy-wide trade-off: a short-run trade-off between inflation and unemployment. This short-run trade-off plays a key role in the analysis of the business cycle–the irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed. Policymakers can exploit the short-run trade-off between inflation and unemployment using various policy instruments. By changing the amount that the government spends, the amount it taxes, and the amount of money it prints, policymakers can influence the overall demand for goods and services. Changes in demand in turn influence the combination of inflation and unemployment that the economy experiences in the short run. This is a continuing debate on how policymakers should use them to control the economy, if at all.
