Ten Principles of Economics – Chapter 1 (Microeconomics)

Flashcards covering the key concepts and definitions from Chapter 1: Ten Principles of Economics, including scarcity, tradeoffs, opportunity cost, marginal thinking, incentives, markets, government intervention, market failure, externalities, market power, productivity, inflation, and the short-run inflation-unemployment tradeoff.

What is economics the study of?

The study of how society manages its scarce resources.

What resources are considered scarce in the notes (examples)?

Time (work/leisure), money (spend/save), firms (what to produce, how much, how many workers to hire), and government needs (defense, goods, environment, schools, roads, police).

Principle #1: What do all decisions involve?

Tradeoffs.

What is the efficiency vs. equity tradeoff described in the notes?

More equity (redistributing income from the well-off to the poor) can reduce efficiency by reducing incentive to work.

What is opportunity cost?

The value of the next best alternative forgone to obtain something.

What are the opportunity costs of attending ECU as listed?

Giving up income from working now, plus tuition/fees, plus cost of books.

How does Blockbuster DVD renting differ from Netflix in cost accounting?

Blockbuster includes price plus travel costs to pick up/return; Netflix has a monthly price and reduces transaction costs (time/travel).

What does marginal mean in economics?

Small incremental adjustments (or 1-unit changes).

Principle #3: How do rational people think?

They think at the margin.

What is an incentive?

Something that induces a person to act (reward or punishment).

Give an example of incentives mentioned in the notes.

Examples include paying for a math workbook to motivate study and tax credits for solar power.

What is the concept of trade and specialization under markets?

Trade allows specialization; a market is a group of buyers and sellers that organizes production, distribution, and consumption.

What is the 'invisible hand' in economics?

Prices guide households and firms to promote overall economic well-being.

Why might governments intervene in markets?

To improve market outcomes when there is market failure or when outcomes are inequitable.

What are two main causes of market failure?

Externalities and market power.

What is an externality?

A side effect of production or consumption affecting bystanders; can be negative (pollution) or positive (education).

What is market power?

A single buyer or seller has substantial influence on market price (e.g., monopoly).

What determines a country’s standard of living according to Principle 8?

Productivity—the amount of goods/services produced per hour of labor.

What factors influence productivity?

Equipment, skills, and technology available to workers (other factors like unions or foreign competition have less impact per notes).

What causes inflation, per the notes?

Excessive growth in the quantity of money; money loses value as more is printed.

What is Principle #10 about?

There is a short-run tradeoff between inflation and unemployment; policy can push one up while the other falls.

What is the effect of trade on consumers and producers, broadly?

Trade can lower prices and improve welfare through specialization and competition.

What role do property rights play in markets?

Enforcing property rights (via police and courts) creates incentives to work, produce, invest, and purchase.

What is the role of marginal analysis in decision-making (recap)?

Rational people compare marginal costs and marginal benefits when making decisions.