Chapter 1: The Big Ideas in Economics

A comprehensive set of Q&A flashcards covering the key concepts from Chapter 1: The Big Ideas in Economics.

What is economics?

The study of how society manages its scarce resources.

What is microeconomics?

The study of how households and firms make decisions and interact in markets.

What is macroeconomics?

The study of economy-wide phenomena including inflation, unemployment, and economic growth.

Name the five big ideas in economics listed on Page 3.

Incentives Matter; Good Institutions Align Self-Interest with the Social Interest; Trade-offs Are Everywhere; Think on the Margin; Trade Makes People Better Off.

What are incentives in economics?

Rewards and penalties that motivate behavior (sticks and carrots).

What is the definition of incentives?

Rewards and penalties that motivate behavior; also called sticks and carrots.

What is a market?

An interaction of buyers and sellers of a particular good or service, guided, in theory, by an invisible hand.

What can government do if markets don’t work well?

Change incentives with taxes, subsidies, or regulation.

What is opportunity cost?

The value of the best opportunity given up when a choice is made.

What is scarcity?

A resource is scarce when there isn’t enough to satisfy all wants; it is limited in supply.

What does 'Think on the Margin' mean?

We make choices by considering the benefits and costs of a little more or a little less; marginal means one more or one less.

What are marginal concepts?

Marginal cost, marginal revenue, and marginal tax rates.

What is comparative advantage?

When people or nations specialize in goods with low opportunity costs, trade creates mutual benefits.

Why does trade make people better off?

Trade increases production through specialization and allows economies of scale; trades are voluntary and can benefit everyone.

Why is wealth and economic growth important?

Wealth enables healthier and better lives; economic growth requires the right institutions and incentives.

Name some institutions that foster growth.

Property rights; meritocracy; freedoms and responsibilities; political stability; honest government; dependable legal system; competitive/open markets.

Can booms and busts be avoided?

They cannot be avoided but can be moderated using fiscal and monetary policy; improper use can increase volatility.

What causes inflation?

Increases in the money supply by the central bank, especially when money grows faster than goods and services rise.

What is inflation?

An increase in the general level of prices.

What is the role of the Federal Reserve (the Fed)?

The central bank that is often called on to combat recessions; policy effects have lags and conditions are a moving target.

What is the takeaway about economics?

Economics helps us understand the world around us and navigate it more confidently and comfortably.

What is the ultimate message of Page 28?

The basic principles of economics affect everyone, everywhere, all the time; economics shapes everyday life.