Video Notes: Chapter 1 - Principles of Economics (Vocabulary)

Vocabulary flashcards covering key economic concepts from the lecture notes.

Phillips curve (short-run)

In the short run, expansionary policies lower unemployment but raise inflation, while contractionary policies lower inflation but raise unemployment.

Business cycle

Fluctuations in economic activity, such as production and employment, over time.

Stimulus during a recession

Fiscal stimulus (e.g., Obama’s 2008-09 package) and monetary stimulus (Federal Reserve money-supply expansion) to reduce unemployment.

Efficiency

Getting the most from scarce resources.

Equality

Distributing economic prosperity uniformly across society.

Rational people

People who purposefully try to do the best they can to achieve their objectives.

Marginal change

A small incremental adjustment to a plan of action.

Productivity

Goods/services produced per unit of labor.

Property rights

The ability to own and control scarce resources.

Market efficiency (example: Uber)

Markets respond to incentives and demand; Uber often allocates resources efficiently compared with heavily regulated taxis.

Role of government in market economies

To enforce property rights, prevent market failures, and promote equality.

Market failure

When a market on its own fails to allocate resources efficiently (e.g., pollution or monopoly).

Externality

When one person's actions affect someone else without payment (e.g., factory pollution).

Market power

When a person or small group can control prices (e.g., town with only one water source).

Government policies for equality

Policies like income tax, welfare programs, and social services.

Standard of living and productivity

A country's standard of living is determined by productivity (goods/services produced per worker).

Differences in living standards (productivity)

Differences across countries stem from productivity differences, not merely wages, unions, or competition.

Inflation

Overall increase in prices in the economy.

Causes of inflation

Printing too much money, which reduces the money’s value.

Thinking at the margin

Making small incremental changes and comparing marginal benefits to marginal costs.

Diamond-water paradox

Diamonds are expensive due to high marginal benefit per unit; water is cheap due to abundance and low marginal benefit per extra unit.

Incentives

Rewards or punishments that encourage or discourage behavior.

Incentives in everyday life

Examples like gas taxes encouraging fuel-efficient driving.

Incentives and unintended consequences

Policies can have unexpected effects; e.g., seat-belt laws can lead to riskier driving (Peltzman effect).

Trade and specialization

Trade lets people/countries specialize in what they do best and obtain more goods at lower cost.

Mutual gains from trade

Countries can benefit from trade even when they compete; both sides can gain.

Prices and self-interest

Prices and individuals’ self-interest guide decisions of buyers and sellers.

Market economy

An economy where resources are allocated through decentralized decisions of households and firms in markets.

Invisible hand

Adam Smith’s idea that individuals pursuing self-interest unintentionally promote society’s well-being.

Economy (origin and meaning)

From Greek oikonomos, meaning a household manager; economies resemble large households managing scarce resources.

Scarcity

Society’s resources are limited; we cannot get everything we want.

Economics

The study of how society manages scarce resources—production, distribution, and consumption of goods and services.

Allocation of resources

How a society allocates people, land, buildings, and machines to different jobs, and who gets the produced goods.

Trade-off

Choosing one thing usually means giving up another.

Real-life trade-off

Examples like parents choosing between food, clothing, vacation, or saving for college.

Guns vs. butter

A classic trade-off: more defense spending means less for consumer goods.

Efficiency vs. equality trade-off

Policies to increase equality can reduce efficiency; efficiency means maximum output, equality means even distribution.

Opportunity cost

What you give up to get something (e.g., tuition, books, or foregone earnings when going to college).