Economics Ch.1

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Terms in this set (53)
"Invisible Hand"The principal that self-interested market participants many unknowingly maximize the welfare of society as a wholeMarket FailureA situation in which the market fails to allocate the resources efficiently.ExternalityWhen one person's actions have an impact on a bystanderMarket PowerThe ability of an individual or group o substantially influence market pricesMonopolyThe case in which there is only one seller in the marketProductivityThe amount of goods and services produced from each unit of labor inputInflationAn increase in the overall level of pricesBusiness CycleFluctuations in economic activityTo Allocate means to...RedistributeThe 3 Categories of the 10 Principles of Economics• How People Make Decisions • How People Interact • How the Economy Works as a WholeTrade-OffTo get more of something we like, we have to give up something else that we like.Trade-Off: Efficiency v EqualityTax and welfare policies make incomes more equal, but they reduce work incentive. Thus, the economy doesn't produce as much.Rational people...• Do the best they can to achieve their objectives • Weigh marginal costs and benefits • Only proceed with an action if the marginal benefit exceeds the marginal cost • Respond to changes in costs and benefitsPublic PolicyCan alter the costs or benefits of activities- sometimes with unintended consequences, because the alter behavior in a manner that was not predicted.Why is trade good for everyone?Trade allows each trader to specialize in what he or she does bestMarket Economies ask...• WHAT is produced • HOW will the goods be produced • WHO will PRODUCE the goods? • HOW MUCH is produced • WHO CONSUMES the producePrice controls (tax or restricted prices) are used by WHO to WHAT?Used by the government to distort prices Leads prices to fail in guiding economic activity.What is the gov's first priority?Protecting property rights in order for the market to workTrade-Off: Inflation & Unemployment (short run)• Increased quantity of $= INFLATION • Increased spending • Rise in price and production • More hiring • REDUCES UNEMPLOYMENT SO, inflation reduces unemployment in the short run. This means that it is only temporary, however.Policy makers can affect the mix of inflation and unemployment by changing...• government spending • taxes • quantity of moneyHow People Make Decisions? (4 Principals)• People face TRADE-OFFS • The COST of something is what you give up to get it • RATIONAL People think AT the margin • People respond to INCENTIVESHow People Interact? (3 Principals)• Trade can make EVERYONE better • Markets are usually a good way to organize eco activity • Governments can SOMETIMES improve market outcomeHow the Economy as a Whole Works? (3 Principals)• A country's standard of living depends on its ability to produce goods and services • Prices rise when the gov prints too much money (INFLATION) • Society faces a short-run TRADE-OFF between INFLATION AND UNEMPLOYMENTEconomics is the study of...How society manages its scarce resourcesIn economics, the cost of something is...What you give up to get itHigh school athletes who skip college to become highly paid professional athletes...Understand that the opportunity cost of becoming a pro athlete is very highA rational decision maker takes an action only if the...Marginal benefit is greater than the marginal costMike has spent $500 purchasing and repairing an old fishing boat, which he expects to sell for $800 once the repairs are complete. Mike discovers that, in addition to the $500 he has already spent, he needs to make one more repair, which will cost another $400, in order to make the boat worth $800 to potential buyers. He can sell the boat as it is now for $300. What should he do?He should complete the repairs and sell the boat for $800What is the most accurate statement about trade?Trade can make EVERY nation better offOne advantage market economics have over centrally planned economics is that market economics...Are more efficient (over equal)The term used to describe a situation in which markets do not allocate resources efficiently is...Market failureLaws that restrict smoking in public places are examples of gov intervention that intended to reduce...ExternalitiesIn the US, incomes grow about 2% per year. So, average income doubles every ______ years.35 yearsIn the ______ run, falling inflation is associated with ________ unemployment.In the SHORT run, falling inflation is associated with RISING unemployment. (indirect correlation)List one economic advantage for both market and government systems of dealing with scarcity.Market System Advantage: Economic efficiency Gov System Advantage: Ability to deal w/ economic market failure (positive or negativ externalities)Greg is trying to make a decision about going on vacation. Transport expences are $700, lodging is $600, recreational is $250, and food is $500 compared to $300 at home. Greg will NOT earn $1,500 from work if he goes. a) Calculate the total cost of the vacationTotal cost: $3,300Quantity DemandThe amount that a consumer is WILLING to buy at a specific price (movement along the demand curve) ↑price=↓demand=↓QUANTITY demandDemandThe ABILITY / DESIRE to purchase goods and services (shift in the demand curve)Left-Shift demand shows that...Buyers are willing to buy a SMALLER quantity for a LOWER price.Right-Shift demand shows that...Buyers are willing to buy a LARGER quantity for a HIGHER price.An increase in price caused a decrease in quantity demand OR demand?Quantity demandDisprove: ↑demand=↑price=↓demand=↓price=↑demand foreverThis is confusing a change in "demand" (shift in the demand curve) with a change in the "quantity demanded" (movement along the demand curve). The part ↑price=↓demand is wrong b/c the QUANTITY demanded will fall. This is not a change in demand, and therefore the remaining statement does not follow.Production Possibilities CurveShows the opportunity cost of producing one more unit of one good in terms of the amount of the other good that must be given up.