Chapter 1 Flashcards
Scarcity
the limited nature of society’s resources
economics
the study of how society manages its scarce resources
ten principles of economics
Principles of how people make decisions
1. people face trade-offs
2. the cost of something is what you give up to get it
3. rational people think at the margin
4. people respond to incentatives
the principles of how people interact
5. trade can make everyone better off
6. markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
principles of how the economy as a whole works
8. a country’s standard of living depends on its ability to produce goods and services
9. prices rise when the government prints too much money
10. society faces a short-run trade-off between inflation and unemployment
efficiency
when society gets the most from its scarce resources
equality
when prosperity is distributed uniformly among society’s members
tradeoff
to achieve greater equality, could redistribute income from wealthy to poor. but this reduces incentive to work and produce, shrinks the size of the economic “pie”
making decisions
requires comparing the costs and benefits of alternative choices
opportunity cost
any item is whatever must be given up to obtain it
rational people
systematically and purposefully do the best they can to achieve their objectives. make decisions by evaluating costs and benefits or marginal changes
incentive
something that induces a person to act, i.e. the prospect of a reward or punishment
market
a group of buyers and sellers, organize economic activity means determining what goods to produce, how to produce them, how much of each to produce, who gets them
a market economy
allocates resources through the decentralized decisions of many households and firms as they interact in markets
invisible hand
works through the price system, the interaction of buyers and sellers determines prices, each price reflects the good’s value to buyers and the cost of producing the good
corollary
government intervention
market failure
when the market fails to allocate society’s resources efficiently