Chapter 1: Ten Principles of Economics

A comprehensive set of Question-and-Answer flashcards covering the key concepts from Chapter 1: Ten Principles of Economics.

What is the fundamental economic problem described in Chapter 1?

Resources are scarce; economics studies how society manages its scarce resources.

What does 'scarcity' mean in economics?

The limited nature of society's resources.

How is Economics defined in these notes?

The study of how society manages its scarce resources.

What is meant by tradeoffs in decision making?

Making decisions requires trading off one goal for another; there is no free lunch.

What is the 'no free lunch' principle?

There is always a cost to obtaining any good or action; you must give up something.

What is Efficiency in economics?

The property of society getting the most it can from its scarce resources.

What is Equity in economics?

The property of distributing economic prosperity fairly among the members of society.

What is Opportunity Cost?

Whatever must be given up to obtain some item.

What are Marginal Changes?

Small incremental adjustments to a plan of action.

How do marginal changes influence decision making?

Rational people compare the additional benefits (marginal benefits) with the additional costs (marginal costs) of an action.

What role do Incentives play in economics?

People change their behavior in response to costs and benefits; policies can alter incentives and behavior.

Can trade be mutually beneficial?

Yes; trade allows specialization and gains for both parties, including within families and between nations.

Why are Markets usually a good way to organize economic activity?

They coordinate decisions of many firms and households; prices reflect values and resource costs.

What is a Market Economy?

An economy that allocates resources through the decentralized decisions of many firms and households in markets.

What does the term 'invisible hand' refer to?

Adam Smith's idea that self-interest can lead to socially desirable outcomes through market prices.

When can Governments improve market outcomes?

When there is market failure or concerns about equity.

What is Market Failure?

A situation in which a market left on its own fails to allocate resources efficiently.

What is an Externality?

The impact of one person’s actions on the well-being of a bystander.

What is Market Power?

The ability of a single economic actor (or small group) to influence market prices.

What determines a country’s standard of living?

Productivity—the quantity of goods and services produced per hour of a worker’s time.

What is Productivity?

The quantity of goods and services produced from each hour of a worker’s time.

What causes Inflation?

An increase in the overall level of prices in the economy, typically due to growth in the money supply.

What are common examples of money growth leading to inflation?

Germany after World War I and the United States in the 1970s.

What is the Phillips Curve?

The short-run tradeoff between inflation and unemployment.

Why is the inflation-unemployment tradeoff sometimes controversial?

Because some prices adjust slowly, the tradeoff may be temporary and not uniform across the economy.