Chapter 1 Ten Principles of Economics — Fill in the Blank Review

Fill-in-the-blank flashcards covering the core concepts and principles from the chapter notes.

Scarcity is the \\ nature of society’s resources.\n\n

limited, meaning that society possesses fewer resources than the collective wants and needs of its members, leading to fundamental economic choices.\n\n

Economics is the study of how society \\ its scarce resources.\n\n

manages, which includes how individuals, firms, and governments make decisions about resource allocation to satisfy wants and needs amidst scarcity.\n\n

People decide what to buy, how much to work, save, and \\.\n\n

spend, influencing demand, production, and the overall allocation of goods and services in the economy.\n\n

Firms decide how much to produce and how many workers to \\.\n\n

hire, thereby determining output levels, labor demand, and contributing to the supply side of the economy.\n\n

Society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other \\.\n\n

needs, reflecting the collective priorities and tradeoffs a society makes in allocating its scarce resources.\n\n

All decisions involve \\.\n\n

tradeoffs, meaning that making one choice inherently requires giving up an alternative; there is always an opportunity cost involved.\n\n

Going out with friends the night before your exam leaves less time for \\.\n\n

studying, illustrating a personal tradeoff where leisure time is chosen over academic preparation.\n\n

Having more money to buy things requires working longer hours, which leaves less time for \\.\n\n

leisure, showcasing a common tradeoff between income generation and personal free time.\n\n

Protecting the environment requires resources that could otherwise be used to produce \\.\n\n

consumer goods, highlighting a societal tradeoff between environmental preservation and the production of goods for immediate consumption.\n\n

Society faces an important tradeoff: efficiency vs. \\.\n\n

equality, referring to the societal dilemma of how to maximize the benefits from scarce resources (efficiency) versus distributing those benefits uniformly among society's members (equality).\n\n

To achieve greater equality, we could redistribute income from wealthy to poor. But this reduces \\ to work or produce.\n\n

incentive, as redistribution might lessen the motivation for individuals to work hard, innovate, or produce more if their rewards are significantly reduced for the benefit of others.\n\n

The opportunity cost of any item is \\ must be given up to obtain it.\n\n

whatever, representing the value of the next best alternative that was not chosen or foregone when a decision was made.\n\n

The opportunity cost of going to university for a year is not just the tuition, books, and fees, but also the \\ wages.\n\n

foregone, meaning the income that could have been earned if the student had worked instead of attending university.\n\n

Seeing a movie is not just the price of the ticket, but the value of the \\ you spend in the theater.\n\n

time, emphasizing that the value of an individual's time spent on an activity is a crucial component of its true opportunity cost.\n\n

Rational people systematically and purposefully do the best they can to achieve their \\.\n\n

objectives, implying that rational individuals make consistent, goal-oriented decisions by weighing costs and benefits to maximize their utility or desired outcomes.\n\n

They make decisions by evaluating costs and benefits of marginal changes, \\ adjustments to an existing plan.\n\n

incremental, referring to small, step-by-step adjustments or additions to an existing course of action, where rational people compare the marginal benefits and marginal costs.\n\n

When students consider whether to go to university for an additional year, they compare the fees & foregone wages to the extra income they could earn with the extra year of \\.\n\n

education, evaluating the marginal benefits (increased future earnings) against the marginal costs (additional fees and lost income) of extended schooling.\n\n

When managers consider whether to increase output, they compare the cost of the extra labor and materials to the additional \\ revenue.\n\n

expected, as managers forecast the additional income they anticipate generating from increasing production, weighing it against the additional expenses incurred.\n\n

Incentive: something that \\ a person to act.\n\n

induces, motivating individuals to make specific choices by altering the costs or benefits associated with those choices.\n\n

When gas prices rise, consumers buy more \\ and smaller cars.\n\n

hybrid, as higher gas prices create a strong financial incentive for consumers to choose more fuel-efficient vehicles to reduce their transportation costs.\n\n

When cigarette taxes increase, the number of people \\ falls.\n\n

smoking, demonstrating how increased taxes serve as a disincentive, making the activity more expensive and thereby discouraging consumption.\n\n

Market: a group of buyers and sellers \\.\n\n

need not be in a single location, as markets can operate virtually, through networks, or simply through the interactions that facilitate exchange, transcending physical boundaries.\n\n

A market economy allocates resources through the decentralized decisions of many households and firms as they interact in \\.\n\n

markets, where prices and self-interest guide economic activity and resource distribution without central planning by the government.\n\n

Adam Smith in The Wealth of Nations (1776): Each of these households and firms acts as if 'led by an \\ hand.'\n\n

invisible, a metaphor by Adam Smith describing the unintended social benefits resulting from individual self-interested actions, primarily through the price mechanism in a free market.\n\n

The invisible hand works through the price \\.\n\n

system, where prices adjust to balance supply and demand, conveying information and creating incentives that guide resource allocation and economic activity efficiently.\n\n

Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s \\ well-being.\n\n

economic, referring to the overall prosperity and efficient allocation of resources for the community, even though individual actors are primarily pursuing their own interests.\n\n

The invisible hand will only work if governments enforce property rights (with police, courts).\n\n

property, referring to the protection of property rights which are essential for market transactions, investment, and the functioning of the 'invisible hand' in a market economy.\n\n

Definition of property rights: the ability of an individual to own and \\ control over scarce resources.\n\n

exercise, ensuring that individuals and firms can securely hold and use their assets, which is fundamental for economic activity and trade.\n\n

A government can interfere with the economy to promote \\ (where there is market failure) and equity.\n\n

efficiency, which means maximizing the benefits from scarce resources and ensuring they are allocated optimally to prevent market failures, and also to promote equity in distribution.\n\n

Market failure: when the market fails to allocate society’s resources \\.\n\n

efficiently, leading to a suboptimal outcome where resources are either under-allocated or over-allocated from a societal perspective, requiring potential government intervention.\n\n

Externalities occur when the production or consumption of a good affects bystanders (e.g. \\).\n\n

pollution, which is a negative externality, representing a cost imposed on third parties