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economy
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one who manages a household
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scarcity
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the limited nature of society's resources
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economics
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the study of how society manages its scarce resources.
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economists
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study how people make decisions, how much they work, what they buy, how much they save, and how they invest their savings
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people face tradeoffs
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principle 1
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Efficiency and equality
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what are the two trade-offs society faces?
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Efficiency
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means that society is getting the maximum benefits from its scarce resources
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equality
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means that those benefits are distributed uniformly among society's members.
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welfare
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what is an example of a policy aimed to equalize distribution of economic wellbeing?
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the cost of something is what you give up to get it
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principle 2
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opportunity cost
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is what you give up to get that item
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rational people think at the margin
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principle 3
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rational people
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people that systematically and purposefully do the best they can to achieve their objectives, given the available opportunities
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marginal change
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describes a small incremental adjustment to an existing plan of action
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marginal benefits and marginal costs
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what two things do rational people use when making decisions?
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People respond to incentives
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Principle 4
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incentive
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something that induces a person to act, such as the the prospect of a punishment or reward.
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Trade can make everyone better off
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Principle 5
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greater variety
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trade allows countries to specialize in what they do and enjoy a _________________of goods and services.
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Markets are usually a good way to organize economic activity
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principle 6
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communist countries
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their economies are operated on the premise that gov't officials were in the best position to allocate the economies scarce resources, centralized planning
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market economy
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an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
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invisible hand
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in the 1776 book, " An Inquiry into the nature and causes of the wealths and nations", Adam Smith made the conclusion: households and firms interacting in markets as if they're guided by an __________________________ that leads them to desirable market housecomes
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price
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in any market, buyers look at their _____________ when determining how much to demand
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price
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in any market, sellers look at their _____________, when deciding how much to supply
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maximize
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adam smith believed that prices adjust to guide these individual buyers and sellers to reach outcomes that in many cases, _______________the well being of society as a whole.
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taxes
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what is an example of gov't intervening in the invisible hand's ability to coordinate the decisions of the households and firms by affecting the allocation of resources?
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Governments can sometimes improve market outcomes
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Principle 7
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property rights
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market economies needs institutions to enforce _____________________so individuals can own and control scarce resources.
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market failure
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a situation in which a market left on its own fails to allocate resources efficiently
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Externality and market power
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what are the two causes of market failures?
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Externality
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the impact of one person's actions on the well-being of a bystander
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market power
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the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
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a country's standard of living depends on its ability to produce goods and services
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principle 8
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Productivity
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the quantity of goods and services produced from each unit of labor input
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Prices rise when the government prints too much money
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principle 9
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Inflation
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an increase in the overall level of prices in the economy
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Society faces a short-run trade-off between inflation and unemployment
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principle 10