Econ Quiz #1

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Principle 1: Scarcity Forces Tradeoffs

the idea that limited resources force people to make choices and face tradeoffs when they choose

Principle 2: Costs Versus Benefits

the idea that people choose something when the benefits of doing so outweigh the costs

Principle 3: Thinking at the Margin

the idea that many decisions involve choices about using or doing a little more or a little less of something rather than making a wholesale change

Principle 4: Incentives Matter

the idea that people respond to incentives in generally predictable ways

Principle 5: Trade Makes People Better Off

the idea that people benefit by focusing on what they do well and then trading with others, rather than trying to do everything for themselves

Principle 6: Markets Coordinate Trade

the idea that markets are usually the best way to coordinate exchanges between buyers and sellers

Principle 7: Future Consequences Count

the idea that decisions made today have effects in the future

Supply and Demand

The idea that Adam Smith came up with, the Higher the prices, the higher the value and demand. The lower the price, the lower the value and demand.

“Invisible Hand” of the Market

The market sets the prices

Means of production: land

natural resources

Means of production: Labor

time and effort that people devote to providing goods and services

Means of production: Capital

a man-made tool or something a machine uses to produce a goo

Human Capital

Increasing labor value through education, knowledge, experience, and job training.

Entreuprenuership

A person who creates a system for the means of production. (business founder/owner)

Cost/Benefit Chart

a chart that splits the costs and benefits of something. It is used to judge the pros and cons of something so an individual can make an informed decision.

Oppourtunity cost

By investing your time in something, you are missing other potential opportunities that come your way.

Law of Diminishing Returns

A principle stating that profits or benefits gained from something will represent a proportionally smaller gain as more money or energy is invested in it.

Rational-Behavior Mode

Assumption that people will make rational choices [Exceptions do apply, i.e., addiction]

Ceteris paribus

all other things being equal, holding other variables constant.

Three Fundamental Economic Questions

• What goods and services are to be produced?

• How are goods and services to be produced?

• For whom are goods and services to be produced?

These are the questions that every economy needs to answer

Traditional Economy

Not a very complex society, with a low population (everyone serves roles depending on their gender)

Command Economy

Decisions about what, how, and for whom to produce are made by a powerful ruler or some other The goal is to accumulate wealth and goods for the ruling class while preserving economic stability.

Market Economy

An economic system in which economic decisions are left up to individual producers and consumers

Mixed Economy

An economic system in which both the government and individuals play important roles in production and consumption

History of the Industrial Revolution

The Industrial Revolution was a time of almost pure capitalism (market economy). Many people worked in factories doing simple tasks. During this time, socialism emerged due to the harsh conditions that a pure capitalist society produced.

Qualities of a Capitalist system

private property, competition, businesses, profit motive, “invisible hand” of the market, supply and demand

Adam Smith, Wealth of Nations

A well-known book that described the capitalist system.

Qualities of a Democratic Socialist System

some government intervention, workers' rights, minimum wage, unemployment, retirement aid, safety, and environmental standards.

Qualities of a Communist system

No private property/business, forced income equality, govt sets prices, Profits are shared by workers, cooperation>competition, get rid of the free market, get rid of the profit motive, Quantity over quality

Karl Marx, Communist Manifesto

a well-known book that describes the communist system

Profit Motive

people are driven to innovate and produce high-quality  items to make a profit