Chapter 1-2: Ten Principles of Economics and Thinking Like an Economist

Flashcards covering Chapter 1: Ten Principles of Economics and Chapter 2: Thinking Like an Economist.

What is scarcity?

The limited nature of society’s resources.

What is economics?

The study of how society manages its scarce resources.

What is efficiency?

Getting the most output from scarce resources.

What is equality (equity)?

Distributing prosperity fairly among society’s members.

What is opportunity cost?

Whatever you give up to obtain something.

What are rational people?

Individuals who systematically and purposefully do the best they can to achieve their objectives.

What is a marginal change?

A small, incremental adjustment to an existing plan of action.

What is an incentive?

Something that induces a person to act.

What is a market economy?

An economy where decisions are made by many firms and households interacting in markets.

What are property rights?

The ability of individuals to own and control resources.

What is market failure?

A situation in which the market 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 group) to influence market prices.

What is productivity?

The amount of goods and services produced per unit of labor.

What is inflation?

An increase in the overall level of prices in the economy.

What is a business cycle?

Fluctuations in economic activity, such as employment and production.

What is the scientific method in economics?

The dispassionate development and testing of theories about how the world works.

What is a model in economics?

A simplified representation of reality used to study economic issues.

What is the circular-flow diagram?

A visual model showing how money flows through markets among households and firms.

What is the production possibilities frontier (PPF)?

A graph showing combinations of output the economy can produce given resources and technology.

What is microeconomics?

The study of individual households and firms and how they make decisions in markets.

What is macroeconomics?

The study of economy-wide phenomena like inflation, unemployment, and growth.

What is a positive statement?

A claim that describes the world as it is (fact-based).

What is a normative statement?

A claim that describes how the world ought to be (opinion or value judgment).

What are assumptions in economics?

Simplifications made to understand complex reality (e.g., 'ceteris paribus' = other things equal).

How does opportunity cost appear in the PPF?

It shows the tradeoffs between producing different goods along the frontier.