EC 110 Microeconomics Test #1, Chapter 1 (Zirlott)

study of how society manages its scarce resources;
- how people decide what to buy, how much to work, save, and spend
- how firms decide how much to produce, how many workers to hire
- how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs

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

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

when prosperity, or success, is distributed uniformly among society's members. (fairness)

the limited nature of society's resources

when society gets the most from its scarce resources. (most bang for their buck)

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".
Example:
- "invest more in education. the higher the education, the greater the income"
- "going to a party the night before an exam leaves less time for studying"
- "having more money to buy stuff requires working longer hours, which leaves less time for leisure"
- "protecting the environment requires resources that could otherwise be used to produce consumer goods"

- whatever must be given up to obtain an item
- making decisions requires comparing the costs and benefits of alternative choices
- it is the relevant cost for decision making

the highest valued alternative given up

systematically and purposefully do the best they can to achieve their goal

make decisions by evaluating costs and benefits of marginal changes - incremental adjustments to an existing plan

rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods.
- "specialize" meaning that the united states can't produce everything, therefore they trade for other items because they specialize in food and cars.
- for countries: they get a better price abroad for goods they produce, they also buy other goods more cheaply from abroad then could be produced at home

a group of buyers and sellers (does not need to be in a single location)

- WHAT goods to produce
- HOW to produce them
- HOW MUCH of each to produce
- WHO gets them

distributes resources through the decisions of many households and firms as they interact in markets

- the interaction of buyers and sellers determines price
- each price reflects the good's value to buyers and the cost of producing the good
- prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being
Example: "Apple is the wealthiest company. because of popularity, people are constantly buying the newest iPhone or tablet, which creates a new job for someone, allowing them to provide for their family

when the market fails to distribute society's resources efficiently

when the production or consumption of a good affects bystanders
Outcomes:
- "pollution"
- "driving instead of walking"

a single buyer or seller has substantial influence on market price
Outcomes:
- "monopoly"
- "a market failure"

something that induces a person to act, i.e the prospect of a reward or punishment
Example:
- "when gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs"
- "when cigarette taxes increase, smoking falls"

- enforce property rights (with police, courts, etc.), government may alter market outcome to PROMOTE EQUITY
Example:
- "people are less likely to work, produce, invest, or purchase if large risk of their property being stolen"
- "the purge"
- "if the market's distribution of economic well-being is not desirable, tax or welfare policies can change how the economic "pie" is divided"

- the amount of goods and services produced per unit of labor
- depends on the equipment, skills, and technology available to workers
- other factors (labor unions, competition from abroad) have far less impact on living standards

increases in the general level of prices

- in the short-run (1-2 years), many economic policies push inflation and unemployment in opposite directions
- other factors can make this tradeoff more or less favorable, but the tradeoff is always present