principles 5-7 Flashcards
(27 cards)
what do the next 3 principles (5-7) deal with
how people interact with one another
what is principle 5
trade off can make everyone better off
why is trade with two countries a good thing
it can make countries better off
- each country can specialize in what they are good at
- we can buy greater variety of goods and services at lower costs
how is trade for individuals a good ting
allows each person to specialize in the activities they are best at (farming, sewing, selling, management)
what is principle 6
markets are usually a good way to organize economic activity
what is market economy : definition
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
how is a market economy different than communism
decisions of a central planner are replaced by the decisions of millions of firms and households
Firms - decide who to hire and what to make
Households - decide which firms to work for and what to spend their money on
- these firms and households interact with the market place, where prices and self-interest guide their decisions
what are free markets
- have many buyers an sellers
- numerous goods and services
- all interested primarily in their own well-being
who is Adam Smith
made the most famous decision in all of economics
what was the decision Adam Smith made
households and firms interacting in markets act as if they are guided by an invisible hand that leads them to desirable market outcomes
what are prices
- are the instruments with which the invisible hand directs economic activity
- buyers look at the price when determining how much to demand
- sellers look a the price when determining how much to supply
decisions that buyers and sellers make (how much to buy based on price as well as how much to sell based on price) market prices reflect what
both the value of a food to society and the cost to society of making the good
what was Smith’s great insight with regards to prices
prices adjust to guide individual buyers and sellers to reach outcomes that, in many cases, maximize the welfare of society as a whole
what happens when governments prevent prices form adjusting naturally to supply and demand
- it impedes the invisible hand’s ability to coordinate the millions of households and firms that make up the economy
explain the failure of communism
prices were not determined in the market place but were dictated by central planners
- central planners failed because they tried to run the economy with one hand tied behind their backs - the invisible hand of the market place
what is principle 7
governments can sometimes improve market outcomes
definition: property rights
the ability of an individual to own and exercise control over scarce resources
definition: market failure
a situation in which a market is left on its own fails to allocate resources efficiently
definition; externality
the impact of one person’s actions on the well-being of a bystander
definition: market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
if the invisible hand is so great why do we need the government/
- invisible hand needs gov. to enforce rules and maintain the institution 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
what are the two broad reasons for a gov. to intervene in the economy and change the allocation of resources that people would choose on their own
- to promote efficiency
2. to promote equity
what do most policies aim either to do
to enlarge the economic pie or
to change how the pie is divided
what is the goal of efficiency
invisible hand usually leads markets to maximize the size of the economic pie it is not always the case though
when this happens we have market failure
