micro ch 1,2,3 vocab

word “economics” origin

greek word - oikos

microeconomics

economics of the firm, individual, household

macroeconomics

economy-wide, whole

traditional economy

resources were allocated in the past and are passed down generation to generation

command economy

government owns resources, decides what you do, central planning board

market economy

allocates resources through the decentralized decisions of many households as they interact in the market for goods and services

principle 1

people face tradeoffs

examples of tradeoffs

arms vs butter —> arms = military spending, butter = consumer spending, what people want

income vs environmental protection —> lowers income when cleaner practices are put into use

economic efficiency —> tradeoff is lower economic efficiency

principle 2

the cost of something is what you give up to get it

opportunity cost

whatever must be given up to obtain some item

principle 3

rational people think at the margin

marginal change

small, incremental adjustment to a plan of action

principle 4

people respond to incentives

perverse incentives

incentives that lead to unintended consequences

principle 5

trade can make everyone better off

principle 6

markets are usually a good way to organize economic activity

invisible hand

let the market work, invisible hand guiding

laissez faire

gov’t hands off

principle 7

governments can sometimes improve market outcomes

how can the government improve market outcomes?

stronger property rights laws, contracts, courts, police (law and order), promote efficiency, provide public goods, promote equality

principle 8

a country’s standard of living depends on its ability to produce goods and services

productivity

the quantity of goods and services produced from each unit of labor input

gdp

gross domestic product, primary measure of productivity, measures the total dollar amount of all the products and services produced in a year

per capita

per head

principle 9

prices rise when government prints too much money

effects of inflation

poor struggle, discourages from saving money for future since it will be worth nothing

cpi

consumer price index - main measure of inflation

causes of inflation

“supply shocks” - supply of a key resource is restricted, gov’t prints too much money

principle 10

society faces a short-run tradeoff between inflation and unemployment

short run

6 months, couple yrs

long run

much later, ultimately

the tradeoff between unemployment and inflation

can’t have low unemployment and low inflation - tools used to fight inflation increase unemployment / vice versa

ceteris paribus

all else equal

factors of production

things needed to make a business/product (land, labor, captial)

ppf

productions possibilities frontier - what can we produce with what we have, shows combinations of goods that can be provided with our resourcse/f.o.p

straight line on ppf

constant opp. cost (similar types of labor, adaptable)

“bowed out” ppf line meaning

increasing opp. cost

positive statement

factual, describes the world as it is

normative statement

describes the world the way it should be/aspriational/idealisitc

why do economists disagree

differing values

labor intensive

lots of people, not much tech (like robots) to do labor - produces clothes, toys, phones - ex- china

land intensive

lower population but lots of land, produces wool, beef, cattle, other animals - ex- austrailia

capital intensive

makes airplanes, cars, mining equipment - ex- u.s.,south korea

autarky

a country that doesn’t trade, produces all goods by themselves - ex- north korea

absolute advantage

can produce a good more efficiently/with less inputs than another country

comparative advantage

can produce a good at a lower opportunity cost than another country