📘 Microeconomics Flashcards – 10 Principles of Economics

What is principle 1?

People face trade-offs → to get one thing, you give up another.

What do economists study?

How individuals decide (work, spend, save, invest), how firms decide (produce, hire), and economy-wide trends (income, unemployment, inflation).

What is principle 2?

The cost of something is what you give up to get it.

What is an example of a trade-off?

Going to a party before an exam = less time to study.

What is opportunity cost?

The value of the next best alternative given up.

What is Principle 3?

Rational people think at the margin → make small, incremental decisions by comparing marginal benefits & marginal costs.

What is Principle 4?

People respond to incentives → changes in costs/benefits influence behavior.

What happens when the price of a good increases?

Buyers purchase less, sellers produce more.

What is Principle 5?

Trade can make everyone better off → increases variety, lowers costs, and allows specialization.

What is Principle 6?

Markets are usually a good way to organize economic activity → prices guide what is produced, how, and for whom.

What is Adam Smith’s “invisible hand”?

Prices adjust to guide buyers and sellers toward outcomes that maximize society’s well-being.

What is Principle 7?

Governments can sometimes improve market outcomes → enforce property rights & fix market failures.

What are two sources of market failure?

Externalities (pollution) and market power (monopoly).

What is Principle 8?

A country’s standard of living depends on its productivity.

What is productivity?

The quantity of goods and services produced from each unit of labor.

What is Principle 9?

Prices rise when the government prints too much money → leads to inflation.

What is inflation?

An overall rise in the price level of the economy.

What is Principle 10?

Society faces a short-run trade-off between inflation and unemployment.

What does the inflation-unemployment trade-off mean?

Policies that lower unemployment often increase inflation in the short run, and vice versa.