question
Scarcity
answer
the limited nature of society's resources (labor, land, physical capital)
question
Economics
answer
the study of how society manages its scarce resources
question
How many principles of economics are there?
answer
10
question
Principle #1
answer
Because Resources are scarce, People Face Trade-Offs
question
Trade-Off
answer
a sacrifice that must be made to get a certain product or experience.
question
Opportunity Cost
answer
is the value of the next best alternative choice you could have made instead of the actual choice you made
question
What trade-off does society face?
answer
Efficiency vs. Equity (equality)
question
Efficiency
answer
when society gets the most from its scarce resources
question
Equity
answer
when prosperity is distributed uniformly or "fairly" among society's members
question
The Problem with solving society's issue:
answer
To achieve greater equality, society could redistribute income from wealthy to poor. BUT this reduces incentive to work and produce, thus shrinking the size of the economic "pie."
question
Principle #2
answer
The Cost of Something is What You Give Up to Get It (also known as opportunity cost)
question
Principle #3
answer
Rational People Think at the Margin. They make decisions by evaluating marginal cost and marginal benefits.
question
Marginal Changes
answer
incremental adjustments to an existing plan
question
Sunk Cost
answer
cost already incurred and cannot be recovered
question
Principle #4
answer
People Respond to Incentives
question
Incentive
answer
Something that induces a person to act that is the prospect of a reward or punishment
- RATIONAL people respond to these
- RATIONAL people respond to these
question
Rational
answer
based on or in accordance with reason or logic.
question
Principle #5
answer
Trade Can Make Everyone Better Off. (Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods.)
question
Country Benefits from Trade & Specialization
answer
Country's can:
- Get a better price abroad for goods they produce
- Buy other goods more cheaply from abroad than could be produced at home
- Get a better price abroad for goods they produce
- Buy other goods more cheaply from abroad than could be produced at home
question
Principle #6
answer
Markets Are Usually A Good Way to Organize Economic Activity
- "Organize" economic activity means determining
- "Organize" economic activity means determining
question
Adam Smith's Quote about Market Economy
answer
"Each of these households and firms acts as if "led by an invisible hand" to promote general economic well- being."
question
Market Economy
answer
allocates resources through the decentralized decisions of many households and firms as they interact in markets
question
Command Economy
answer
An economic system in which the government controls a country's economy.
question
Invisible Hand Works through what?
answer
The Price System
- The interaction of buyers and sellers determines prices
- Each price reflects the good's value to buyers and the cost of producing the good.
- Prices guide interested households and firms to make decisions, that, in many cases, maximize society's economic well-being, or efficiency.
- The interaction of buyers and sellers determines prices
- Each price reflects the good's value to buyers and the cost of producing the good.
- Prices guide interested households and firms to make decisions, that, in many cases, maximize society's economic well-being, or efficiency.
question
What is important for the market mechanism to work?
answer
Property Rights. People are less inclined of work, produce, invest, or purchase if there is large risk of their property being stolen. Even with proper enforcement of property rights, the market mechanism can sometimes lead to inefficient allocation of resources
question
Market
answer
a group of buyers and sellers (not necessarily a place
question
3 Economic Problems every society must solve
answer
1. What (and how much) to produce
2. How to produce them
3. For whom to produce: who gets them
2. How to produce them
3. For whom to produce: who gets them
question
Principle#7
answer
Governments Can Sometimes Improve Market Outcomes
- Govt may alter market outcome to promote equity If the market's distribution of economic well-being is not desirable, tax or welfare policies can change how the economic "pie" is divided.
- Govt may alter market outcome to promote equity If the market's distribution of economic well-being is not desirable, tax or welfare policies can change how the economic "pie" is divided.
question
Market Failure
answer
when the market fails to allocate society's resources efficiently.
question
What are the 3 causes of market failure?
answer
Externalities, Market Power, and Public Goods.
- In such cases, well designed public policies may promote efficiency
- In such cases, well designed public policies may promote efficiency
question
Externalities
answer
when the production or consumption of a good affects bystanders (e.g. pollution)
question
Market Power
answer
a single buyer or seller has substantial influence on market price (e.g. monopoly)
question
Public Goods
answer
defense services, parks, etc.
question
What are the two Branches of Economics?
answer
Microeconomics and MACROECONOMICS
question
Microeconomics
answer
branch of economics concerned with how people make decisions and how these decisions interact
e.g., determination of price, employment or output in a particular market or industry.
e.g., determination of price, employment or output in a particular market or industry.
question
Macroeconomics
answer
branch of economics concerned with the overall economy. e.g., determination of national income, economic growth, recessions, inflation.
question
Principle #8
answer
A Country's Standard of Living Depends on Its Ability to Produce Goods & Services
question
What is the most important determinant of living standards?
answer
Productivity, the amount of goods and services produced per unit of labor
- Productivity depends on the equipment, skills, and technology available to workers
- Other factors, that is, labor unions, competition from abroad have far LESS impact on living standards.
- Productivity depends on the equipment, skills, and technology available to workers
- Other factors, that is, labor unions, competition from abroad have far LESS impact on living standards.
question
Principle #9
answer
Prices Rise When the Government Prints Too Much Money
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
