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Economics Topics 1 & 2abc
Terms in this set (33)
meeting together of people for the purpose of trade by private purchase and sale; is a broad term (market for apples, human kidneys, spouses, political influence, etc.); anything that consists of willing buyers and sellers
the true cost of anything is what you must give up to get it; if you want more of something (benefit), then you must give up something else (cost); life is a series of tradeoffs -
example: driving fast is fun and gets you places faster, but you run a greater risk of getting in an accident → you can drive slow and arrive safely or drive fast and risk an accident → if cars are made safer, more people are likely to drive fast because they can arrive fast as a lower risk of an accident
What is the economic model (ECM)?
People respond to incentives; if benefits and costs change, then behavior will change
example: increase in college enrollment during recession: no jobs available → people aren't working → they have time to go to college → enrollment increases, prices decrease
Thinking at the Margin
making decisions by thinking in terms of marginal benefits and marginal costs;
deciding whether to do or use one additional unit of some resource
benefits & costs
broad terms; being happier and having more money are benefits; being sad or going without ice cream are costs
making choices to achieve goals in the most effective way possible
a good is ________ if you must give something up to get more of it; it does not mean rare (you must give money to get M&M's, but the are not rare); scarcity leads to choices → what should this land be used for?
What is ECM used for?
to address questions
the value of opportunities lost
example: the opportunity cost of attending college decreases during a recession because there are less jobs, so a person loses less income by attending college than they would if there was more jobs available
Gains from Trade
the increase in value of a good after a trade is made; also called surplus
example: If a have a baseball card I value at $5 and you value at $10, a trade makes us both better off → the value of the card increases
- idea of invisible hand
- "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest"
- wrote "Wealth of Nations" in 1776
addresses the consequences of an action
expresses a value judgement
Is the ECM positive or normative?
P or N? If the price of potato chips goes down, people will eat more potato chips.
P or N? People eat too many potato chips.
P or N? Daycare should be high quality and inexpensive.
P or N? Raising the quality of daycare will raise daycare's price.
P or N? It is important that everyone be covered by health insurance.
P or N? Requiring that individuals with pre-existing health conditions pay the same price for insurance as healthy individuals will raise prices paid by healthy individuals.
Principal 1: Incentives Matter
− The economic model can be summarized as "people respond to incentives."
− People make choices in response to the benefits and choices presented by those decisions
− As the benefits and/or costs of a decision change, (some) people change what they do.
Principal 2: Life consists of trade-offs
This is a fundamental implication of scarcity
- You want some more of "X" (that's the benefit)
- You must give up some of "Y" (that's the cost)
- "There is no such thing as a free lunch"
This is why economics is often called "the dismal science"
− And hence the term "opportunity cost"
- The true cost of anything is what you must give up to get it
Principal 3: Trade makes people better off
Trade is a voluntary activity: people only trade if they expect to be made better off
Principal 4: For all this to result in a good allocation of resources, political and legal institutions must align "self-interest" with the "social interest"
For example, if institutions are "good", you get rich by developing new products, or better or less expensive versions of existing product
- In order to make yourself better off, you must make others better off too
Good institutions achieve this by protecting property rights and provide checks on government power (through such things as independent courts)
the next best alternative, which is being sacrificed; what you give up
example: cost of attending college is time, and money that could be earned otherwise during that time
Does ever trade have a winner and loser?
No. Trade is voluntary and therefore mutually beneficial; people would not trade unless they expected to be made better off
Marginal means ________
additional; study another hour, buy another slice of pizza
MB > MC
when this is true, do it
Why do people trade?
they suspect to be maded better off
How does trade make everyone better?
trade enables specialization, which allows for more overall knowledge
the ability to produce the same good using fewer inputs than another producer
production possibilities frontier
shows all the combinations of goods that a country can produce given its productivity and supply of inputs
producing goods which it has the lowest opportunity cost
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