The 10 Principles of Economics

What are the three categories that the principles of economics fall under?

1. How people make decisions.

2. How people interact.

3. How the economy as a whole works.

What’s a trade-off?

To get one thing you want, you usually must give up another thing you want. Making decisions: trading off one goal for another.

“To get one thing you want, you usually must give up another thing you want. Making decisions: [replacing] one goal [with] another.”

This is the definition of which principle of economics?

A trade-off

“The more a society spends on the military to protect from foreign aggressors, the less it can spend on consumer goods to raise its standard of living.”

This is an example of what type of trade off?

Society

“Society gets the maximum benefits from its scarce resources.”

This is the definition of-

Efficiency

“Economic prosperity is distributed uniformly among society’s members.”

This is the definition of-

Equality

What category of economic principle does the relationship between efficiency and equality fall under?

Trade-off.

What is the proper term for the principle which dictates that the cost of something is what you’re willing to give up to get it?

Opportunity cost

If you’re willing to give up your time and money to attend college, this is an example of which economic principle?

Opportunity cost

What is the opportunity cost of an item?

Whatever must be given up to obtain said item.

What does it mean to say that rational people think at the margin?

A person will make decisions in their life by evaluating costs and benefits of marginal changes.

What constitutes a rational person?

Persons who are systematical and purposeful in their actions and their capability to help one reach their goals, given their available opportunities.

Define marginal changes.

Small incremental adjustments to a plan of action

Define incentive.

Something that induces a person to act, but also, may have unintended consequences.

Do people typically respond to incentives?

Yes

Why do people typically respond to incentives?

Because rational people make decisions by comparing costs and benefits. By implementing incentive, you increase the benefit in comparison to one’s cost.

How do people benefit from trade?

People can buy a greater variety of good and services at lower cost.

How do countries benefit from trade?

Trade allows countries to specialize in what they do best, and trade also increases the variety of goods and services.

Define a market.

A group of buyers and sellers (need not be in a single location)

How do markets organize economic activity?

Markets define what goods and services are produced, how to produce these goods and services, and how to allocate them to their final user.

What does a market economy do?

The market economy allocates resources through the decentralized decisions of many firms and households.