Principles of Economics Review

This set of flashcards covers key concepts from the principles of economics, including scarcity, trade-offs, market functions, and various economic models.

What is the definition of Scarcity in economics?

Scarcity refers to the situation where unlimited wants exceed limited resources available to fulfill those wants.

What is Microeconomics?

Microeconomics is the study of individual behavior in decisions and interactions, focusing on households, firms, and markets.

What is Macroeconomics?

Macroeconomics is the study of the economy as a whole, including aggregate sectors such as GDP, inflation, and unemployment.

According to the first principle of economics, what do people face?

People face trade-offs.

What is Opportunity Cost?

Opportunity cost is the value of the next best alternative that is forgone when making a decision.

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

It means that optimal decisions are made by comparing marginal benefits and marginal costs.

How do people respond to incentives?

People change their behavior in response to perceived benefits or costs.

What are the benefits of trade according to economics?

Trade can make everyone better off by allowing for specialization and exchange.

What is the role of markets in economic activity?

Markets help determine what goods and services will be produced, how they are produced, and who receives them.

What is the definition of GDP?

GDP (Gross Domestic Product) is the market value of all final goods and services produced in a country during a specific period.

What causes inflation according to the lecture notes?

Inflation can be caused by demand-pull factors, cost-push factors, and the government printing too much money.

What is the relationship between inflation and unemployment in the short run?

There is a short-run tradeoff where society faces higher inflation and lower unemployment during expansions.

What is Positive Analysis?

Positive analysis relies on facts and logic to describe the world as it is.

What is Normative Analysis?

Normative analysis relies on value judgments to prescribe how the world should be.

What is the meaning of the term 'Comparative Advantage'?

Comparative advantage refers to when an individual or entity can produce a good or service at a lower opportunity cost than others.

What is the production possibility frontier (PPF)?

The PPF is a graph that shows the maximum combinations of two goods that an economy can produce efficiently given its resources.

What factors can shift the long-run aggregate supply curve?

The long-run aggregate supply curve can shift due to changes in labor, capital, natural resources, or technology.

What is the formula for calculating real interest rate?

Real interest rate = Nominal interest rate - Inflation rate.

What is the Sticky Wage Theory?

The Sticky Wage Theory states that wages do not adjust immediately to changes in economic conditions, influencing the short-run supply curve.

What is Stagflation?

Stagflation refers to the combination of stagnant economic growth, high unemployment, and high inflation.

How can government policies affect unemployment?

Government can implement training programs, change interest rates, and provide fiscal stimulus to reduce unemployment.

What role do financial markets play in the economy?

Financial markets facilitate the allocation of resources by connecting savers who supply funds with borrowers who demand funds.

What happens in a market failure?

Market failure occurs when the allocation of goods and services is not efficient, often due to externalities, market power, or public goods.

Why do long-run economic growth rates differ across countries?

Differences in growth rates can depend on factors such as labor productivity, savings rates, and technological progress.