Chapter 1- Ten Principles Of Economics

Front 1

Scarcity

Back 1

The limited nature of society's resources.

Each individual in a society cannot achieve the highest standard of living.

Front 2

Economics

Back 2

The study of how society manages it's scarce resources.

Front 3

Economy

Back 3

A group of people dealing with one another as they go about their lives

Front 4

What do economists study?

Back 4

Economists study how people make decisions and how the interact with one another. For instance, they examine how the multitude of buyers and sellers of a good together determine the price at which the good is sold and the quantity that is sold.

Economists analyze forces and trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.

Front 5

10 Principles of Economics

Back 5

1. People face trade-offs
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize Economic activity
7. Governments can sometimes improve market outcomes
8. A country's standard of living depends on its ability to produce goods and services
9. Prices rise when the govt prints too much money
10. Society faces a short run trade off between inflation and unemployment

Front 6

Efficiency

Back 6

Society is getting its maximum benefits from its scarce resources

Front 7

Equality

Back 7

Uniform distribution of society's gains to each member in the society

Front 8

Efficiency vs. Equality

Back 8

Trade-off

They often conflict because raising equality will lower drive to be most efficient.

Trying to cut the economic pie into more equal slices makes the pie smaller.

Front 9

Opportunity Cost

Back 9

What you give up to gain a certain item

Ex: largest opportunity cost of going to college is not cost of tuition, but pay you missed not working

Front 10

Rational People

Back 10

people who systematically and purposefully do the best they can to achieve their objectives, given the available opportunities

Front 11

Marginal Change

Back 11

A small incremental adjustment to a plan of action

Ex: studying one extra hour rather than watching TV

Front 12

Margin

Marginal benefits vs. Marginal Costs

Back 12

"edge"

How rational people make decisions--weighing the marginal benefits vs. the marginal costs

Front 13

Rational person only takes action if the marginal benefit is...

Back 13

...greater than the marginal cost

Front 14

Incentive

Back 14

Something that induces someone to act, such as prospect of punishment or reward

Front 15

Trade can make everyone better off--why?

Back 15

Because of specialization

Front 16

Market Economy

Back 16

Decisions are made by millions of firms and households.
No one is looking out for the good of the economy as a whole, but only for their own good--yet it proves to be good for the economy over all

Front 17

"Invisible Hand"

Back 17

Adam Smith- 1776

Households and firms act as if an invisible hand was guiding them towards desirable market outcomes.

Prices are the instrument with which the invisible hand directs economic activity.

Front 18

Prices

Back 18

Buyers look at the price to determine how much to demand, Sellers look at the price to determine how much to supply.
THEREFORE
Prices reflect the value of the good to society AND the cost to society in making the good

Front 19

Invisible hand/prices

Back 19

Prices adjust to guide these individual buyers and sellers to reach outcomes that, in many cases, maximize the well-being of society as a whole----- hence the "invisible hand"

Front 20

Property Rights

Back 20

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

One of the main reasons government is really necessary--to enforce regulations and guidelines surrounding property rights

Front 21

2 broad reasons for a government to intervene in the economy and change the allocation of resources that people would choose on their own:

Back 21

To promote efficiency
To promote equality

(in other words, most policies either enlarge the economic pie or change how the pie is divided)

Front 22

Market Failure

Back 22

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

Front 23

Externality

Back 23

(One possible cause of market failure)
The impact of one person's actions on the well-being of a bystander (ex:pollution)

Front 24

Market Power

Back 24

(One possible cause of market failure)

The ability of a single economic actor, or small group of actors, to have a substantial influence on market prices.

Ex: everyone needs water, but there's only one well in town. The owner of the well has market power...and government intervening is often the only way to enhance economic efficiency.

Front 25

Productivity

Back 25

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

Front 26

Almost all the difference in living standards is determined by...

Back 26

productivity of the nation

Front 27

If you want to raise living standards, focus on....

Back 27

...raising productivity

Front 28

Inflation

Back 28

An increase in the overall level of prices in the economy

Front 29

What causes inflation?

Back 29

Growth in the quantity of money

Front 30

Business Cycle

Back 30

Fluctuations in economic activity, such as employment and production

Front 31

Short-term trade-off between inflation and unemployment

Back 31

more money=more demand=less unemployment

more money=inflation