V1 Flashcards
V1 (25 cards)
What is the first principle of economics?
-
People face trade-offs
Making decisions requires trading off one goal against another. - Scarcity forces people to make choices
- To get one thing, we usually have to give up something else
What is the second principle of economics?
- The cost of something is what you give up to get it
- Opportunity cost: the next best alternative that must be sacrificed to obtain something
What is the third principle of economics?
- Rational economic agents (an individual, firm or organization, that has an impact in some way on an
economy) think at the margin - Marginal changes = Small, incremental changes to a plan of action are analyzed for optimal decisions
-> People make decisions by comparing
costs and benefits at the margin - Being rational is the assumption that economic agents can make consistent choices between
alternatives.
What is the fourth principle of economics?
- People respond to incentives (Anreize)
- The decision to choose one alternative over another occurs when that alternative’s marginal benefits
exceed its marginal costs! - Policies can create incentives that change behaviors
What is the circular-flow diagram?
- A model that shows how dollars flow through markets among households and firms
- Households sell factors of production, buy goods and services
- Firms buy factors of production, sell goods and services
What does the Production Possibilities Frontier (PPF) show?
- Shows the combinations of output that the
economy can possibly produce given the
available factors of production and the available
production technology - Concepts: efficiency, trade-offs, opportunity cost, and economic growth
What is positive vs normative analysis?
- Positive statements: describe the world as it is (descriptive)
- Normative statements: describe how the world should be (prescriptive)
What is the role of assumptions in economics?
- Economists make assumptions to simplify reality
- Different assumptions are made to answer different questions
Principles of Economics
Efficiency v. Equity (Principle 1)
Efficiency means society gets the most that it can from its scarce resources
Equity means the benefits of those resources are distributed fairly among the members of society (what fair is depends on the society)
What is the fifth principle of economics?
-Trade Can Make Everyone Better Off
- People gain from their ability to trade with one another
- Competition results in gains from trading
- Trade allows people to specialize in what they do best
e.g. international
e.g. textile industry collapsed in Switzerland.. people lost their job..
What is the sixth principle of economics?
-Markets Are Usually a Good Way to Organize Economic
Activity
What is the seventh principle of economics?
-Governments Can Sometimes Improve Market Outcomes
What is the eighth principle of economics? m
-A Country’s Standard of Living Depends on Its Ability to
Produce Goods and Services
What is the nineth principle of economics? m
-Prices Rise When the Government Prints Too Much Money
What is the tenth principle of economics? m
-Society Faces a Short-run Trade-off between Inflation and
Unemployment
Market vs. Planned economic systems
Microeconomics and Macroeconomics
Empiricism
Economic Models
The Circular-Flow Diagram
The Circular-Flow Diagram
GDP = Gross Domestic Product, how big an economy is and how much is produced
PPF
Red line: Leading to an outward shift of the
Production Possibilities Frontier
Summary 1
