Intro to Econ. - Chapter 1: Principles of Economics

needs principles 1-4

Trade can make everyone better off

by trading with others, people can buy a variety of goods and services at lower cost

trade allows individuals to specialize in their best activities or products

Markeys are usually a good way to organize economic activity

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

the decisions of central planner are replaced by the decisions of millions of firms and households

households and firms interact with the marketplace; prices and Sefl interest guide their decisions

prices are the instrument with which the invisible hand directs economic activity

taxes adversely affect the allocation of resources because they distort prices and thus the decisions of households and firms

Governments can sometimes improve market outcomes

property rights: the ability of an individual to own and exercise control over scare resources

we rely on government-provided police and courts to enforce our rights over the things we produce

the government intervenes to promote efficiency to promote equality

market failure: a situation in which a market left on its own fails to allocate resources efficiently

externality: the impact of one person’s actions on the well-being of a bystander

two possible causes of market failure is externality and market power

market power: the ability of a single economic actor (or small group of acts) to have a substantial influence on market prices

in the presence of externalities or market power, well designed public policy can enhance economic efficiency

a country’s standard of living depends on its ability to produce goods and services

productivity: the quantity of goods and services produced from each unit of labor input

the growth rate of a nations productivity determines the growth rate of its average income

more goods and services produced = higher standard of living (and vise versa)

prices rise when the govenremnt prints too much money

inflation: an increase in the overal level of prices in the economy

keeping inflation at a reasoble rat eis a goal of eocnomic ploicy makers around the world

society faces a short run tradeoff between inflation and unemployment

increasing the amount foo money in the economy stimulates the overall level of spending and thus the demand from goods and services

higher demand over time can cause first to rais their prices, but it also encourages them to hire more workers and produce a larger quantity of goods and services

more highering means lower unemployment

short-run trade-off plays a key role in the analysis of the business cycle

business cycle: fluctuations in economic activity such as employment and production