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25 Cards in this Set
- Front
- Back
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Define: scarcity
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Society has limited resources and therefore cannot produce all the goods a services people wish to have
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Define: economics
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The study of how society manages its scarce resources
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Principle 1: People face trade-offs
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-To get one thing we like, we have to give up another thing we like
-Example trade-offs: "guns and butter" (defense and consumer goods), clean environment and high level of income -Efficiency and equality usually conflict (distributes income to poor, reduces reward for hard work) |
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Define: efficiency
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Society is getting the maximum benefits from its scarce resources (size of economic pie)
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Define: equality
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Benefits are distributed uniformly among society's members (how economic pie is divided)
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Principle 2: The cost of something is what you give up to get it
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-Comparing costs and benefits (includes monetary and non-monetary)
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Define: opportunity cost
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Whatever must be given up to obtain some item
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Principle 3: Rational people think at the margin
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-Economists assume people are rational
-Life is not black and white: marginal changes (marginal costs vs. marginal benefits) -Ex: plane $500/passenger (average), standby passenger $300 = YES because cost is only peanuts/drink (marginal cost) < $300 -Diamonds cost more than water because willingness to pay based on marginal benefit that extra unit would yield (diamonds are rare) -Rational thinker makes decision if marginal benefit > marginal cost |
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Define: rational people
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People who systematically and purposefully do the best they can to achieve their objectives
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Define: marginal changes
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small incremental adjustments to a plan of action
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Principle 4: People respond to incentives
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-Rational people compare costs and benefits, respond to incentives
-"People respond to incentives. The rest is commentary." -Ex: high apple price -> less consumers -> more workers, more product -Ex: Europe gas tax high -> smaller cars, public transportation, carpool, etc. -Ex: seatbelt law -> safer in accidents, but changes cost-benefit calculation (might drive more recklessly), negatively impacts pedestrians -Analyzing policy: take into account direct effect and less obvious indirect effects |
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Define: incentive
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Something that induces a person to act
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Principle 5: Trade can make everyone better off
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-Can be seen as a bad thing
-Ex: Japan and USA (Ford vs. Toyota, Apple vs. Sony) -Trade between 2 countries can actually make each better off -Ex: families compete for jobs, groceries, but better than isolation -Specialize in what they do best, enjoy greater variety in goods and services -Partners AND competitors |
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Principle 6: Markets are usually a good way to organize economic activity
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-Many countries that once had centrally planned economies (ex: Soviet Union) now have market economies
-Firms and households of market economy interact in marketplace, where prices and self-interest guide decisions -Adam Smith, 1776: "invisible hand" guides households and firms, leading to desirable market outcomes -"invisible hand"=prices because both buyers and sellers look at it to demand/supply -When government impedes natural adjustment, also impedes "invisible hand" -> failure of communism |
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Define: 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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Principle 7: Governments can sometimes improve market outcomes
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-"invisible hand" can only work if gov't enforces rules and maintains institutions key to market economy
-Ex: farmer can't work if crops stolen, restaurant must know people will pay, music industry doesn't want illegal copies -"invisible hand" powerful, but not omnipotent -Government must enforce efficiency in case of market failure (can be caused by externality like pollution or market power) -Ex: every town needs water, but only one well, no "invisible hand"-led competition to check self-interest -Or enforce equality: "invisible hand" does not ensure everyone has sufficient food, decent clothing, adequate healthcare -Can vs. will: policies can be for selfish reasons, policy makers may not have all the info. |
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Define: property rights
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The ability of an individual to own and exercise control over scarce resources
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Define: 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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Define: externality
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The impact of one person's actions on the well-being of a bystander
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Principle 8: A country's standard of living depends on its ability to produce goods and services
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-Differences in living standards around world staggering, changes in living standards over time are large
-Almost all variation attributable to differences in productivity -Growth rate of productivity determines growth rate of average income -Labor unions/minimum-wage laws credited for high productivity, competition blamed for low productivity -Policy makers must raise productivity through education, tools, and access to technology |
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Define: productivity
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The quantity of goods and services produced from each unit of labor input
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Principle 9: Prices rise when the government prints too much money
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-Keeping inflation at low is a goal of economic policymakers around world
-Inflation can be caused by growth in quantity of money (value falls) |
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Define: inflation
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An increase in the overall level of prices in the economy
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Principle 10: Society faces a short-run trade-off between inflation and unemployment
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-Increasing money in economy stimulates overall level of spending, demand for goods and services
-Higher demand may lead to higher prices, but also more workers and production (lower unemployment) -Change gov't spending, change overall demand for goods and services, changes short-run inflation and unemployment |
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Define: business cycle
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fluctuations in economic activity, such as employment and production
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