Microeconomics Ultimate Study Guide Chapter 1*

Incentives

Encourages or discourages action

Marginal benefit

benefit of one more unit

Marginal Cost

cost of one more unit

market economy

Market decides what gets produced

market economy features

Private property + self-interest + prices + competition + supply & demand

prductivity

output per worker

Utility

Satisfaction from consumption.

Opportunity Cost

Next-best option given up

Business cycle

Economy’s ups and downs

Marginal change

Change from one more unit

Centrally planned economy

government decides what gets produced

Invisible hand

Self-interest guides the market.

Inflation

overall prices rise

Monetary cost

Cost measured in dollars.

Monetary policy

Central bank controls money and rates.

Marginal thinking

Extra benefit vs. extra cost.

market power

Ability to market influence price.

Property rights

Right to own and control.

Trade-off

Give up one to get another.

Scarcity

Limited resources, unlimited wants

Efficiency

Most output from resources.

Economic pie

Size of the economy

Rule of 70

70 ÷ growth rate = Growth rate in x years later

How does money supply affect inflation, unemployment, employment, and demand?

Money supply ↑ → Demand ↑ → Jobs ↑ → Inflation ↑

What does the Federal Reserve changing the money supply tell us?

What causes large or persistent inflation?

Too much money supply → too much inflation

What happens when the money supply decreases in the short run?

Money supply ↓ → Demand ↓ → Jobs ↓ → Unemployment ↑

What are the key features of a market economy?

Property + self-interest + prices + competition + supply/demand

How does a centrally planned economy differ from a market economy?

Market = people decide | Planned = government decides

Why does government need to be involved in a market economy?

Protect rights + fix market failures

How does government help enforce property rights?

Laws protect ownership

What does it mean to think at the margin?

Compare: Extra benefit vs. extra cost

How do we measure the business cycle?

ups and downs in real GDP

Real income growth?

2% income growth per year

U.S. inflation in the 1990s

3%

Low/no money-supply growth

Money growth ↓ → Unemployment ↑. short run

Adam Smith / invisible hand

Self-interest → Invisible hand → Market outcomes.

1970s vs. 1990s inflation

Inflatioon higher 1970s

Money supply increases in the short run

Money ↑ → Unemployment ↓ + Inflation ↑.

Market-based economies

Most countries → Market-based.

“No such thing as a free lunch”

People face trade-offs

Economic cost

Economic cost = what you give up