UNIT 1 FLASHCARDS

Economy

-comes from the Greek Word

-means one who manages a household

Scarcity

the limited nature of society’s resources

Economics

the study of how society manages its scarce resources

Principle #1

-there is NO such thing as free lunch

-facing trade offs

-making decisions requires trading off one goal for another

-ex: how a student spends their time

Efficiency

the property of society getting the most it can from its scarce resources

Equity

the property of distributing economic prosperity fairly among society's members

What is a special example of a tradeoff

-efficiency and equity

-e.g. tax dollars paid by wealthy Americans, may improve equity but lower return to hard work, thus reducing efficiency and return of hard work.

-the cost of increased equity is a reduction in the efficient use of our resources

Principle #2

-Making decisions requires individuals to consider the benefits and costs of some actions.

-ex: going to college, spending time and gaining debts, but more pay in the future

Opportunity Cost

whatever must be given up to obtain some item

Principle #3

-Many life decisions involve incremental decisions(step by step)

Marginal Changes

-small incremental adjustments to a plan of action

-ex: deciding to stay in school for another year or two

-not an ex: comparing phd to dropouts

Principle #4

-Because people make decisions by weighing costs and benefits, their choices may change in response to changes in these costs and benefits.

-ex:when the price of a good rises, consumers will buy less of it due to its increased cost

Principle #5

-Trade can make everyone better off

-trade is supposed to benefit both parties

Principle #6

-Markets are usually a good way to organize economic activity

-better than a central government plannar

What does a Market Economy do

-it allocates resources through the decentralized decisions of many firms and households interacting in markets for goods and services

-(an economic system where production, distribution, and prices of goods and services are guided by the forces of supply and demand rather than a central government.)

Principle #7

-Governments Can Sometimes Improve Market Outcomes

-govern,ent intervention of market fails

What are the two primary reasons for government intervention in the economy

-the promotion of efficiency and equity

When is government policy most effective during market failures?

-when a market fails to allocate resources efficiently on its own

def of market failure

a situation in which a market left on its own fails to allocate resources efficiently

def of externality

the impact of one person’s actions on the well-being of a bystander

def of market power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

Principle #8

-A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

def of productivity

the quantity of goods and services produced from each hour of a worker’s time

Principle #9

-Prices Rise When the Government Prints Too Much Money

-when people print too much money, there is an increase in overall prices

def of inflation

an increase in the overall level of prices in the economy