chapter 1 - principles of economics

for micro final

why are choices necessary?

resources are scarce

what is the true cost of something?

the opportunity cost

what is the opportunity cost?

whatever you must give up to get that something

what do people think at?

the margin

marginal change

an incremental change to a plan of action

marginal analysis

deciding how much of an activity to do

what do people respond to?

incentives

if a policy changes incentives, what happens?

people will alter their behavior

how does one gain from trade?

through specialization as trade can allow us to consume more than we otherwise could

how are trade and specialization best organized?

markets

what do markets move to?

equilibrium

what is a market?

a group of buyers and sellers

what is equilibrium?

economic situation in which no individual would be better off doing something different

why do people trust that markets will do what they want?

because markets move to equilibrium

an allocation of resources is ___

efficient

what is efficiency

an economy’s resources are being used efficiently when they’re used in a way that has fully exploited all opportunities to make everyone better off

what else, besides efficiency, should policymakers focus on

equity

what is equity

a condition in which eeryone gets their fair share

when markets are inefficient, what can the government do

the government can intervene to improve society’s welfare

what is market failure

the market fails to allocate resources efficiently