CH 1: Ten Principles of Economics

Micro 202 Ch 1 Key Concepts

scarcity

the limited nature of society’s resources

economics

the study of how society manages its scarce resources

efficiency

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

equality

the property of distributing economic resources uniformly among society's members.

opportunity cost

the cost of forgoing the next best alternative when making a decision

what you give up to get that item

rational people

people who systematically and purposefully do the best they can to achieve their objectives

marginal change

a small incremental adjustment to an existing plan or situation, often used in decision-making.

marginal cost

the cost added by producing one additional unit of a product or service.

marginal benefit

the additional gain received from consuming one more unit of a good or service.

property rights

the ability of an individual to own and exercise control over scarce resources

market failure

a situation where the allocation of goods and services by a free market is not efficient, often justifying government intervention.

externality

a cost or benefit incurred by a third party who is not directly involved in a transaction, leading to inefficient market outcomes

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

market power

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

productivity

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

what do policymakers need to do to boost living standards?

raise productivity by ensuring workers are well educated, have the tools they need to produce goods and services, and have access to the best available technology

in the presence of externalities or market power, well-designed public policy can ___

enhance economic efficiency

what can happen when a government prevents prices from adjusting naturally to supply and demand?

the invisible hand cannot properly coordinate the decisions of households and firms that make up an economy

why is it important and beneficial to participate in trade?

it allows each person, country, etc to specialize in the activity they do best; thus, people can buy a greater variety of goods and services at lower cost.

if policy changes incentives, it will cause people to ____

alter their behavior

incentive

something (such as the prospect of a punishment or reward) that induces a person to act

inflation

an increase in the overall level of prices in the economy

business cycle

fluctuations in economic activity such as employment and production

policymakers can exploit the short-run trade-off between inflation and unemployment by

changing amount of government spending, tax amount, amount of money printed, etc