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Flashcards in lecture 1 review chapter 1-3 Deck (42):
1

scarcity

Inability to satisfy our wants

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Economics

the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

the study of how societies manage their scarce

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macro

economy wide phenomena, including inflation, unemployment, and economic growth.

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micro

the study of how households and firms make decisions and how they interact in markets.

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efficiency

the property of society getting the maximum benefits from it scarce resources

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Opportunity cost

highest valued alternative that must be given up to obtain some item.



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Two components of opportunity cost

- Monetary
- Non-monetary (the things you can’t do with your time if you go to the concert.

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Marginal cost vs marginal benefit

- The benefit from pursuing an incremental increase in an activity is its marginal benefit.
- The opportunity cost of pursuing an incremental increase in an activity is its marginal cost

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If the marginal benefit from an incremental increase in an activity exceeds its marginal cost

your rational choice is to do more of that activity.

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A change in marginal cost or marginal benefit changes

the incentives that we face and leads us to change our choice.

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We need governments for 2 reasons.

- Enforces the rules and maintains the institutions that are key to a market economy.
o Property rights: the ability of an individual to own and exercise control over scarce resources.


- To promote efficiency and equity.

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o The goal of efficiency

♣ market failure: a situation in which a market left on its own fails to allocate resources efficiently
♣ externality: the impact of one person’s actions on the well-being of a bystander.

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o Goal of equity.

♣ Even when the invisible hand is yielding efficient outcomes, it can nonetheless leave sizable disparities in economic well-being.

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Productivity:

the quantity of goods and services produced from each hour of a worker’s time.

GDP per capita and GDP per hour are closely linked.

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Inflation

an increase in the overall level of prices in the economy.

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causes of inflation

o Demand
o Supply
o Printing money

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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.

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Desired:

low inflation and low unemployment

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Expansion

high inflation, low unemployment

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Recession

low inflation, high unemployment.

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Circular flow diagram

a visual model of the economy that shows how dollars’ flow through markets among households and firms.

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Production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

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Positive statements:

claims that attempt to describe the world as it is.

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Normative statements:

claims that attempt to prescribe how the world should be.

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Opportunity cost

measures the cost of not being able to produce something else with the resources used.

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Comparative advantage

a country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower than in other countries

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Absolute advantage

the comparison among producers of a good according to their productivity.

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no such thing as a free lunch

- To get something we like, we have to give up something else that we also like. (trading off one goal for another.

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guns and butter

- the more a country spends on national defence, the less it can spend on consumer goods (butter) to raise the standard of living at home.

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trade off between efficiency and equality

- often conflict. Essentially how can we get the most out of resources and how can we make sure they are distributed equally. Policies like welfare or income tax reduce efficiency.

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if an outcome is efficient

points on the curve (rather than inside) represent efficient levels of production.

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principles of how people make decisions

- People face trade-offs

- The cost of something is what you give up to get it.

- Rational people think at the margin.

- People respond to incentives

- People face trade-offs

- The cost of something is what you give up to get it.

- Rational people think at the margin.

- People respond to incentives

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people face trade offs

"no such thing as a free lunch"

Government

Efficiency: The property of society getting the maximum benefits from its scarce resources.

Equity: The property of distributing economic prosperity fairly among the members of society.

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the cost of something is what you give up to get it

Opportunity cost: highest-valued alternative that must be given up to obtain some item.

Example: What is your opportunity cost of going to university?
What is your opportunity cost of going to a concert?

Opportunity cost has two components:

1. The price of the ticket (Monetary)

2. The things you can’t do with your time if you go to the concert (non-monetary).

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RATIONAL PEOPLE THINK AT THE MARGIN


Rational people: People who systematically and purposefully do the best they can to achieve their objectives.

Marginal changes: Small incremental adjustments to a plan of action.



marginal cost vs. marginal benefit

To make a choice at the margin, you evaluate the consequences of making incremental changes in the use of your time.

The benefit from pursuing an incremental increase in an activity is its marginal benefit.

The opportunity cost of pursuing an incremental increase in an activity is its marginal cost.

If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, your rational choice is to do more of that activity.

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people respond to incentives

incentive: Something that induces a person to act.

A change in marginal cost or a change in marginal benefit changes the incentives that we face and leads us to change our choice.

Example: higher tax to reduce the consumption of something.

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trade can make everyone better off

Trade can make everyone better off
- Trade allows each person to specialize at what he or she does best
- Example: different jobs, countries specialize in different products

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markets are usually a good way to organize economic activity

Markets are usually a good way to organize economic activity

- 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
- Invisible hand: Adam smith observed that households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes

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governments can sometimes improve market outcomes

1. Enforces the rules and maintains the institutions that are key to a market economy
- Property rights: the ability of an individual to own and exercise control over scarce resources
2. To promote efficiency and equity:
- The goal of efficiency
o Market failure: a situation in which a market left on its own fails to allocate resources efficiently
o Externality: the impact of one person’s action on the well-being of a bystander
- The goal of equity
o Even when the invisible hand is yielding efficient outcomes, it can nonetheless leave sizable disparities in economic well-being.

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A countries standard of living depends on its ability to produce goods and services.

- Productivity: the quantity of goods and services produced from each hour of a worker’s time.
- GDP per capita and GDP per hour are closely linked.

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prices rise when the government prints to much money

Inflation: and increase in the overall level of prices in the economy

What causes inflation?
- Demand
- Supply
- Printing money

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society faces a short run trade off between inflation and enemployment

This short run trade-off plays a key role in the analysis of the business cycle.

Business cycle: the irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services of the number of people employed.

Desired
Expansion
Recession