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30 Cards in this Set
- Front
- Back
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Definition of Economics
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the study of how people make choices under conditions of scarcity and the results of those choices
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Principle 1 and example
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Scarcity implies choice
Ex. You get a bad grade on a test so you can either decrease social time and increase time spent on studying OR do neither and keep grade the same |
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Principle 2
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Opportunity costs are incurred
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Opportunity cost
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the value placed on the alternative which must be given up to obtain something
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Principle 3
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Rational people think at the margin
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Marginal Cost and example
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the cost of a small increase in an activity
ex. you want to increase studying time from 5 to 6 hours. the marginal cost is the cost of the additional hour (6th hour) |
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Marginal benefit
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the benefit that arises from a small increase in activity
Ex. studying the extra hour is the expected increase in your course grade to raise |
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Principle 4 and example
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People respond to incentives
Ex. Gasoline tax rises so people use less gas or use different transportation... Gasoline tax caused the incentive |
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Principle 5
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Trade can make everyone better off
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Definition of Efficiency
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the property of society getting the most it can from its scarce resources
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Definition of Equity
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the property of distributing economic prosperity fairly among the members of society
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Definition of incintive
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something that induces a person to act
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Absolute Advantage
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A person has this if they can produce a good with fewer inputs than other producers
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Comparative Advantage
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a person has this if they can produce a good at a lower opportunity cost than another producer
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Example of Absolute advantage and comparative advantage
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Individuals...opp costs > Fish...Coconuts
1. Friday opp cost of fish = 2 coconuts opp cost of coc = 1/2 fish 2. Cruscoe opp cost of fish = 5 coc opp cost of coc = 1/5 fish Friday has absolute adv in coc and fish Friday has compar. adv. in fish (2), but cruscoe has compar. adv. in coc (1/5) |
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Principle 6
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Market economy
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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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Microeconomics
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how households and firms make decisions and interact in markets
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Macroeconomics
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economy-wide phenomena, including inflation, unmployment, and economic growth
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How economists use scientific theory
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they conduct natural experiments offered by history. Like seeing how a war affects oil prices
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why economists use assumptions
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To make investigations easier. Like just assuming that there are only 2 countries producing 2 products or assuming prices will stay the same every year
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PPF
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a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available given technology
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What points are called when they lie inside, on, or outside the PPF
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Inside = inefficient
On = efficient Outside = unattainable |
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Positive statements
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attempt to describe the world as it is
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Normative statements
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attempts to prescribe how the world should be
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Self-sufficient
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Consuming exactly what he or she can produce
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4 inputs of Production
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1. labor (physical and mental effort)
2. capital (goods produced that are used to produce other goods) 3. human capital (skill and knowledge from education, training, and experience) 4. entrepreneurial ability (ability to come up with new ideas and can bear the risks) |
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Why will opp. cost continue to rise when production of one good continues to rise?
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The most skilled workers of the new good must leave the other good being produced so at first the opp cost is not that high. When we continue to produce more and more of the new good, the most skilled producers of the other good must leave it and work produce something they arent that good at and it will be harder to produce the other good.
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What determines who should specialize in which good?
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Whoever has the comparative advantage for the good and if he receives a price for the good he specializes in that his opp cost for producing it
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How do you determine what price to accept to gain from trade?
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If it exceeds the opp cost of you producing that good
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