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Chapter 1 Flashcards

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1
Q

PRINCIPLE 1

A

THE SCARCITY PRINCIPLE`

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2
Q

what does the book say about the scarcity principle

A

people face trade offs

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3
Q

what is the scarcity principle

A

Although we have unlimited wants and needs, the ressources available to us are limited . So, having more of one good thing usually means having less of another.

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4
Q

scarcity

A

situation in which the amount available is insucient to satisfy the desire for it.

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5
Q

what is a trade off

A

an exchange, giving up something that you like for something else that you like

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6
Q

“there is no such thing as a free lunch”

A

milton friedman

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7
Q

free lunch

A

giving up something without giving up anything in return

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8
Q

who is subject to scarcity

A

everyone

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9
Q

PRINCIPLE 2:

A

The OPPORTUNITY COST PRINCIPLE

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10
Q

what is the opportunity cost principle

A

THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT, making decisions requires comparing the COSTS and Benefits of alternative courses of action

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11
Q

what is a benefit of something

A

the gain or pleasure that it brings

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12
Q

what is a cost of something

A

what you MUST give up to get something.

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13
Q

what is benefit measured by

A

what a person is willing to to give up to get it

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14
Q

what is cost in economics

A

OPPORTUNITY COST

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15
Q

what is opportunity cost

A

Whatever must be given up to obtain some item

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16
Q

what are examples of tradeoffs

A

guns and butter
clean enviornment and high income
efficiency and equity

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17
Q

equity

A

a situation in which society’s benefits are distributed uniformly among the society’s citizens

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18
Q

PRINCIPLE 3:

A

THE RATIONALITY PRINCIPLE:

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19
Q

what is the rationality principle

A

RATIONAL PEOPLE THINK AT THE MARGIN

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20
Q

RATIONAL CHOICE:

A

A choice that uses the available resources to best achieve the objective of the person making the choice.

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21
Q

What goods and services will get produced and in what quantities?

A

Those that people rationally choose to buy.

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22
Q

How Do People Choose Rationally?

A

We make RATIONAL CHOICES by comparing COSTS and Benefits.

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23
Q

MARGIN:

A

A choice on the margin is a choice made by comparing all the relevant alternatives
systematically and incrementally.

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24
Q

MARGINAL CHANGE:

A

A small incremental adjustment to a plan of action.

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25
what can help explain puzzling economic phenomena.
marginal decision making
26
what does opprotunity cost equal
implicit cost + explicit cost
27
what is implicit cost
what is sacrificed when no direct payment is made
28
what is explicit cost
the amount you actually pay
29
what is a sunk cost
a cost that is beyond recovery at the moment a decision is made
30
what does rationality in economics mean
that people are capable of establishing goals and acting in a way that is consistent with the achievment of those goals
31
what do rational people do to make a decision
compare the marginal benefit to the marginal cost, ou only take an action if the marginal benefit is greater than the marginal cost
32
what is marginal benefit
the benefit the arises from one additional unit of an activity
33
what is marginal cost
the opportunity cost that arises from one additional unit of an activity
34
1.1d PRINCIPLE 4:
THE INCENTIVE PRINCIPLE
35
what is the incentive principle
PEOPLE RESPOND TO INCENTIVES., A person( or a rm or society) is more likely to take an action if its benefit rises and less likely to take it if its cost rises
36
what is an incentive
A reward or a penalty- a "carrot" or a "stick"-that encourages or discourages an action. TB: Something that induces a person to act.
37
what is key to analyzing how markets work
incentives
38
PRINCIPLE 5:
THE PRINCIPLE OF COMPARATIVE ADVANTAGE
39
what is THE PRINCIPLE OF COMPARATIVE ADVANTAGE
EVERYONE DOES BEST WHEN EACH (or EACH COUNTRY) CONCENTRATES ON THE ACTIVITIES FOR WHICH HIS/HER OPPORTUNITY COST IS LOWEST. TB: TRADE CAN MAKE EVRYONE BETTER OFF.
40
PRINCIPLE 6:
MARKET PRINCIPLE
41
what is the market principle
MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY
42
MARKET:
Any arrangement that brings buyers and sellers together and enables them to get infomation and do business with each other
43
MARKET ECONOMY(or MARKET CAPITALISM):
An economy that allocates resources through the decentralized decisions of many rms and households as they interact in markets for goods and services
44
who owns most resources under capitalism
private citizens
45
what is an alternative model of ownership to capitalism
communism
46
communism
most resources are owned by the state , as in the former Soviet union
47
what does Private ownership of resources do
provides incentives for people to make careful, socially beneficial decisions.
48
SELF INTEREST:
The Choices that are best for the individual who makes them.
49
SOCIAL INTEREST :
The choices that are best for society as a whole
50
what was ADAM'S SMITH OBSERVATION
Households and firms interacting in markets act as if they are guided by an " INVISIBLE HAND" that leads them to desired market outcomes
51
HOW does the "invisible hand work"?
prices
52
PRICE:
The amount of money a buyer must pay to a seller for a good or service. Prices are the instruments(mechanisms) with which the invisible hand directs economic activity.
53
PRINCIPLE 7:
GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES
54
If the invisible hand is so great, why do we need government?
The invisible works well only if the government enforces the RULES and maintains the institutions that are key to a market economy
55
what do market economies need institutions to do
enforce property rights
56
what are property rights
The ability of an individual to own and exercise control over scarce resources The rights of individuals or firms have to the exclusive use of their property, including the right to buy and sell it.
57
THE LEGAL BASIS OF A SUCCESSFUL MARKET SYSTEM.
Government has to take steps to provide a LEGAL ENVIRONMENT that will allow the market system to succeed
58
what are the steps that the government need to take for the market system to work
1. PROTECTION OF PRIVATE PROPERTY | 2. ENFORCEMENT OF CONTRACT AND PROPERTY RIGHTS.
59
what two amendments to the US constitution guarantee property rights
5th and 14th
60
5th amendment
the federal government shall not deprive any person "of life, liberty, or property, without due process of the law
61
14th amendment
No state... shall deprive any person of life, liberty, or property, without due process of law.
62
PRINCIPLE 8
A COUNTRY'S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES.
63
what are almost all variations in living standards across the world attributable to
differences in productivity
64
what is productivity
THE QUANTITY OF GOODS AND SERVICES PRODUCED FROM EACH UNIT OF LABOR UNIT, how much each worker can produce on average, output per worker
65
what is productivity equal to
output / labor
66
higher productivity = ?
higher standard of living
67
what is how productive you are as a worker dependent on
the tools/technology you are provided to work with
68
what doe the growth rate of a nation's productivity determine
the growth rate of its average income.
69
PRINCIPLE 9:
PRICES RISE WHEN THE GOVERNMENT PRINT TOO MUCH MONEY
70
INFLATION:
An increase in the overall of prices in the economy.
71
WHAT CAUSES INFLATION?
In almost all cases, it's growth in the quantity of money. An increase in the money supply causes infation to increase and the value of the money falls.
72
example of inflation
Germany in the early 1920s | the U.S., in the 1970s,
73
PRINCIPLE 10 :
SOCIETY FACES A SHORT-RUN TRADE OFF BETWEEN INFLATION AND UNEMPLOYMENT
74
explain the relationship between inflation and unemployment
Increasing the amount of money in the economy causes more spending thus the demand for goods and services increases. Higher demand may cause firms to raise their prices eventually, but short-term, it causes them to hire more workers and produce a higher quantity of goods and services. More hiring means lower unemployment
75
efficency
the property of society getting the most it can from its scarce resources
76
marginal change
a small incremental adjustment to a plan of action
77
market failure
a situation in which a market left on ts own fails to allocate resources efficiently
78
externality
the impact of one person's on the well-being of a bystander
79
market power
the ability of a single economic factor (or small group of factors) to have a substantial influence on market prices
80
business cycle
fluctuations in economic activity, such as employment and production

Macroeconomics (2 decks)

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