Principles of Economics and Economic Thinking

Flashcards based on Chapter 1 and 2, covering the Ten Principles of Economics, basic economic modeling, and the scientific method in economics.

The word economy is derived from the Greek word oikonomos, which translates to mean __________ cry.

one who manages a household

The fundamental economic problem of __________ means that society has limited resources and cannot produce all the goods and services people desire.

scarcity

The study of how society manages its scarce resources is known as __________.

economics

A permanent trade-off for any society is between "__________," reflecting the choice between military spending and consumer goods.

guns and butter

The property of society getting the most it can from its scarce resources is called __________, while __________ refers to distributing prosperity uniformly among members.

efficiency; equality

The __________ of an item is whatever must be given up to obtain it.

opportunity cost

For most students, the largest cost of attending college is the __________ they forgo while studying.

earnings

Economists assume that __________ people systematically and purposefully do the best they can to achieve their objectives.

rational

A(n) __________ is the term used by economists to describe an incremental adjustment to an existing plan of action.

marginal change

Rational people make decisions by comparing __________ and __________.

marginal benefits; marginal costs

A person's willingness to pay for a good is based on the __________ that an extra unit of the good would yield.

marginal benefit

The fact that people respond to __________ explains why consumers buy fewer apples when prices rise.

incentives

In a 1975 study, economist __________ found that auto-safety laws like seat belt requirements actually led to an increase in pedestrian deaths.

Sam Peltzman

A(n) __________ is an economy that allocates resources through the decentralized decisions of many firms and households.

market economy

In his 1776 book, The Wealth of Nations, __________ famously observed that households and firms act as if guided by an "invisible hand."

Adam Smith

In a market economy, __________ are the instruments with which the invisible hand directs economic activity.

prices

The ability of an individual to own and exercise control over scarce resources is known as __________.

property rights

A situation in which a market left on its own fails to allocate resources efficiently is called a(n) __________.

market failure

A(n) __________ is the impact of one person’s actions on the well-being of a bystander, such as pollution.

externality

The ability of a single economic actor to have a substantial influence on market prices is termed __________.

market power

Almost all variation in living standards between countries is attributable to differences in __________.

productivity

In $2019$, the average American earned about $65,000$, while the average Nigerian earned only $5,000$.

$65,000$; $5,000$

A(n) __________ is an increase in the overall level of prices in the economy.

inflation

In almost all cases of persistent inflation, the culprit is growth in the __________ of money.

quantity

The __________ refers to the irregular and largely unpredictable fluctuations in economic activity, such as employment and production.

business cycle

Society faces a short-run trade-off between __________ and __________.

inflation; unemployment

The __________ is a visual model of the economy showing how dollars flow through markets among households and firms.

circular-flow diagram

In the circular-flow diagram, inputs such as labor, land, and capital are collectively called the __________.

factors of production

The __________ is a graph that shows the various combinations of output an economy can possibly produce given available factors of production and technology.

production possibilities frontier

On the production possibilities frontier, the __________ of the curve measures the opportunity cost of one good in terms of the other.

slope

The subfield of economics that studies how households and firms make decisions and interact in markets is __________.

microeconomics

The subfield of economics that studies economy-wide phenomena, including inflation and unemployment, is __________.

macroeconomics

Claims that attempt to describe the world as it is are called __________, while claims that attempt to prescribe how the world should be are called __________.

positive statements; normative statements

The __________, established in $1946$, consists of three members and a staff of economists who advise the President of the United States.

Council of Economic Advisers

In the coordinate system, the first number in an ordered pair is the __________ and the second is the __________.

x-coordinate; y-coordinate