Chapter 1: The Principles of Economics
Terms in this set (37)
The limited nature of society's resources
The management of society resources are important because...
resources are scarce
The study of how society manages its scarce resources
What do economists study?
1. How people make decisions
2. How people interact with one another
People Face Trade-Offs
Major trade-off people face
Efficiency v. Equality
The property of society getting the most it can from its scarce resources
The property of distributing economic prosperity uniformly among the members of society
The Cost of Something is what you must Give up to Get it
Whatever must be given up to obtain some item. When making any decision, decision makers should be aware of the opportunity costs that accompany each possible action.
Rational People Think at the Margin
People who systematically and purposefully do the best they can to achieve their objectives
A small incremental adjustment to a plan of action
People respond to incentives
Something that induces a person to act
Trade makes Everyone Better Off
Trade allows people to do what?
To specialize in what they do best
Markets are a good Way to Organize Economic Activity
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Wrote "The Wealth of Nations" in 1776 which implied the theory of the "Invisible Hand"
"The Invisible Hand"
Households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desirable market outcomes
What is the true "invisible hand" that guides most decisions?
Governments Can Sometimes Improve Market Outcomes
The ability of an individual to own and exercise control over scarce resources
Two reasons for the government to need to guide the "invisible hand"
1. Promote Efficiency
2. Promote Equality
A situation in which a market left on its own fails to allocate resources efficiently
Two causes for Market Failure:
2. Market Power
The impact of one person's actions on the well-being of an innocent bystander (positive or negative)
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
ex: monopoly on something
A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
Almost all variation within different countries standards of living is their...?
The quantity of goods and services produced from each unit of labor input
Prices rise when the government prints too much money
An increase in the overall level of prices in the economy
Society Faces a Short-Run Trade-off between Inflation and Unemployment
What trade off exists between Inflation and Unemployment?
Due to a rise in prices, companies in the mean time have incentive to hire more employees.
Fluctuations in economic activity, such as employment and production
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