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26 Cards in this Set

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what is the origin of the word "economy"
comes from the greek work for "one who manages a household"
why is management of resources important?
Management of resources is important because resources are scarce.
what does "scarcity" mean?
Scarcity means that society has limited resources and cannot produce all the goods & services that people want.
What is "economics"
Economics is the study of how society manages its scarce resources.
What are the 4 economics principles of individual decision making?
1. People face Tradeoffs.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives.
What goal often conflicts with the goal of efficiency
equity
What is "opportunity cost" ?
The "Opportunity cost" of an item is the opportunity that you give up to get that item.
What do economists mean by "marginal changes" ?
Marginal changes are incremental adjustments to an existing plan of action.
What are the three economic principles that concernin how people interact with one another?
1. Trade can make everyone better off.
2. Markets are usually a good way to organize economic activity.
3. Governments can sometimes improve market outcomes.
What is a "market economy" ?
A market economy is one in which there is no central planner. In a market economy, decisions of a central planner are replaced by the decisions of millions of firms & households.
Adam Smith?
Adam Smith wrote "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776)
What famous observation was made in "Wealth of Nations"?
Households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desireable market outcomes.
What adverse effect results from government interference with prices?
When the government prevents prices from adjusting naturally to supply and demand, it impedes the "invisible hand's" ability to coordinate the millions of households and firms that make up the economy.
Give two examples of government interference with prices that have adverse effects.
1. Sales tax.

2. Rent control.
Why do we need government in given the effectivness of the "invisible hand" of the market?
1. Government must protect the invisible hand ( for example, by enforcing property rights )

2. Government is needed to promote "efficiency" and "equity" when for some reason, the invisible hand does not function properly.
What is a "market failure"
A "market failure" takes place when the market on its own fails to produce an efficient allocation of resources.
What are two possible causes of a "market failure"?
1. An externality
2. Market power
What is an "externality"?
An externality is the impact of one person's actions on the well being of a bystander.
What is "market power"?
Market power is the ability of a single person ( or small group ) to unduly influence market prices.
Why might the "invisible hand" fail to ensure that economic prosperity is distributed equitably?
The "invisible hand" might fail to ensure that economic prosperity is distributed equitably because a market economy rewards people according to their ability to produce things that other people are willing to pay for - not according to even minimal needs.
What are the three economic principles that describe how the economy as a whole works?
1. A country's standard of living depends on its ability to produce goods and services.

2. Prices rise when the government prints too much money.

3 Society faces a short-run tradeoff between inflation and unemployment.
What is "productivity"?
Productivity is the amount of goods and serives produced from each hour of a worker's time.
What (generally) determines the standard of living for a country?
A higher level of productivity leads to a better standard of living. Other factors are of secondary importance.
What is "inflation"?
Inflation is an increase in the overall level of prices in the economy.
What causes inflation?
Inflation is caused by growth in the quantity of money.
What does the Philips curve illustrate?
The Philips curve illustrates the short-run tradeoff between inflation and unemployment.