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36 Cards in this Set

  • Front
  • Back
a system for coordinating society's productive activities
study of economies at the level both of individuals and of society as a whole
Market Economy
an economy in which decisions about production and consumption are made by individual producers and consumers
Invisible Hand
refers to the way in which the individual pursuit of self interest can lead to good results for socity as a whole although this result may not have been part of his intentions
the branch of economics that studies how people make decisions and how these decisions interact
What is Individual Choice
It is the decision of what to do, which necessarily involves what not to do
What are the 4 underlying principles of Individual Choice?
1. Resources are scarce
2. "how much"
3. Individuals will exploit any opportunity to make them better off "incentive"
4. The real cost of something, is what you must give up to get it "opportunity cost"
What is a resource?
Anything that can be used to produce something else

ex. land, labor, capital, and human capital (educational achievment and skills)
When do resources become scarce?
When there isnt enough of a resource to satisfy all productive uses
What is an opportunity cost?
something that is given up in order to get what you want.

Monetary cost: money and cents opportunity cost
What is a trade-off?
a trade-off is when you compare the costs and benefits of doing something
What is a marginal decision and what is the term for the study of it?
Marginal decision is one in which you choose to do a little bit more or a bit less of an activity. This is known as Marginal analysis.
What is an incentive?
B/c people are most likely going to eploit an opportunity to better themselves, an incentive, which is something that offers a reward to people who change there behavior, usually works.
Describe how interaction affects a Market economy?
Interaction of choices-my choices affect your choices, and vice versa-is a feature of most economic situations. The results fo this interaction are often quite different from waht teh individuals intend.
What are the Principles that underlie the Interaction of Individual choices?
1. There are gains from trade
2. Markets move toward equilibrium
3. Resources should be used as efficiently as possible to achieve societies goals
4. Markets usually lead to efficiency
5. When markets dont achieve efficiency, govt intervention can improve societies welfare
Describe trade in a market economy
In a market economy people engage in trade: providing goods and services to others and receive goods and services in return.
Describe what Gains in trade means
people can get more of what they want through trade than they could if they tried to be self-sufficient
What is specialization in a market economy?
The increase in output in this kind of economy is b/c each person specializes in the task that he or she is good at performing
What is economic equilibrium? and why does this ensure that the market will produce what people want?
When no individual would be better off doing something different. Usually price changes are indications of equilibrium situation, b/c people exploit the opportunity to pay less, however, once something is in demand the price usually increases and the opportunity, eliminated.

Markets will produce what people want b/c of profit opportunities and b/c people will seize an opportunity to better themselves
When can an economy be considered efficient?
When opportunities are used to make some people better off without making other people worse off: producng maximum gains from trade given the resources available

ex. Classroom pg. 14
What does equity mean?
it means that everyone is getting their fair share. Since "fairness" is a debatable term the term equity isnt a well-defined concept.
Why is there often a trade off between efficiency and equity?
b/c by being efficent an economy stives to to utilize resources to make everyone better off, while equity is a way of giving everyone a "fair" share, which says nothing about being in the same quantities and some people may not have access to those same opportunities

ex. disabled parking
Why do markets usually lead to efficiency?
b/c people tend not to waste resources. This is b/c they will usually seize opportunities to better themselves and also opportunites for mutual gain are often utilized.

ex. college using small rooms/lower enrollment pg. 15
What three reasons do markets fail?
1. Peoples individual actions have side effects that the market doesnt take into account properly
2. One party prevents mutually beneficial trades from occuring in the attempt to capture a greater share of resources for itself
3. Some goods, by thier very nature, are unsuited for efficient management by markets
How are individuals and economics limited by thier choices?
Individuals are limited by money and time

Economics is limited by natural resources and human supplies
Single Price Monopolist
one who charges all consumers the same price
Price Discrimination? and sensitivity to price Ex/
Charge different prices to differnt customers
/ Airline Tickets
Perfect Price discrimination; the more prices the lower the lowest cost
takes place when monompolist is able to capture the entire surplus; charge each consumer the max that they are willing to pay; no inefficiency
Price Elasticity of demand
% change in quantity demanded
Perfectly Elastic
any change in price causes the demand to go to 0
Perfectly Inelastic
any change in price has no effect on the quantity demanded
Unit elastic=
elasticity of demand = 1
What is a tariff and what effect does it have?
a form of excise tax on a foreign good usually used to deter the good from being imported; it effectivly increases the domestic price and Qd shrikds while Qs increases
What is an import quota
it is a regulatory amt of a good that can be imported; usually regulated through licensing
What is the incidence of tax?
Who bears the majority of the burden of the tax
what effect does a price change have on the total revenue on an elastic, unit elastic and inelastic demand?
Elastic Price increase, decreases TR

Inelastic Price Increase increases TR

Unit elastic stays the same