Ten Principles of Economics

Flashcards created from the lecture notes on Mankiw's Ten Principles of Economics, covering individual decision-making, market interactions, macroeconomic indicators, and trade-offs.

What is the Greek origin of the word 'economy'?

The word 'economy' comes from a Greek word for 'one who manages a household.'

What key economic decisions must every household and society face?

1. Who will work? 2. What goods and how many of them should be produced? 3. What resources should be used in production? 4. At what price should the goods be sold?

Why is the management of society's resources important?

Because resources are scarce, meaning society has limited resources and therefore cannot produce all the goods and services people wish to have.

What is the definition of economics?

Economics is the study of how society manages its scarce resources.

What are the four principles governing how people make decisions?

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 are the three principles governing how people interact with each other?

1. Trade can make everyone better off. 2. Markets are usually a good way to organize economic activity. 3. Governments can sometimes improve economic outcomes.

What are the three principles governing the forces and trends that affect how the economy as a whole works?

1. The standard of living depends on a country's production. 2. Prices rise when the government prints too much money. 3. Society faces a short-run tradeoff between inflation and unemployment.

What is a tradeoff in economics?

A situational decision that involves diminishing or losing one quality, quantity, or property of a set or design in return for gains in other aspects.

How do efficiency and equity differ in resource allocation?

Efficiency means society gets the most that it can from its scarce resources, whereas equity means the benefits of those resources are distributed fairly among the members of society.

What is the opportunity cost of an item?

The opportunity cost of an item is what you give up to obtain that item.

How does Kobe Bryant's decision to enter the NBA directly from high school illustrate opportunity cost?

Kobe Bryant chose to skip college to earn millions in the pros; because his potential earnings were so high, the opportunity cost of attending college was extremely high.

What are marginal changes?

Marginal changes are small, incremental adjustments to an existing plan of action.

According to Principle #4, when does a person choose one alternative over another?

When that alternative's marginal benefits exceed its marginal costs.

According to Principle #5, what are the primary economic benefits of trade?

Trade allows people to specialize in what they do best, fosters competition that results in gains, and allows people to gain from trading with one another.

What is a market economy?

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

What observation did Adam Smith make regarding households and firms interacting in markets?

Adam Smith observed that households and firms act as if guided by an 'invisible hand,' using prices to reach outcomes that tend to maximize the welfare of society as a whole.

What is market failure?

Market failure occurs when the market fails to allocate resources efficiently.

What two factors can cause market failure?

1. Externality, which is the impact of one person or firm's actions on the well-being of a bystander. 2. Market power, which is the ability of a single person or firm to unduly influence market prices.

What is standard of living and how can it be measured?

Standard of living refers to the level of wealth, comfort, material goods, and necessities available to a certain class or geographic area. It can be measured by comparing personal incomes or comparing the total market value of a nation's production (GDP).

What is productivity and why is it significant?

Productivity is the amount of goods and services produced from each hour of a worker's time. It is significant because almost all variations in living standards across countries are explained by differences in productivity.

What is inflation and what primary factor causes it?

Inflation is an increase in the overall level of prices in the economy. It is primarily caused by growth in the quantity of money, which reduces the value of money when created in large amounts.

What relationship and tradeoff is illustrated by the graph shown in this image?

The Phillips Curve illustrates the short-run tradeoff between inflation and unemployment.