EC 110 TEST-CHPT 1
Terms in this set (54)
Comes from greek word oikonomos, which means "one who manages a household"
_______ and economies have much in common.
Once society has allocated people to various jobs, it must also allocate the _________ and ________ they produce.
The management of society's resources is important because resources are _________.
Society has limited resources and therefore cannot produce all the goods and services people wish to have.
The study of how society manages its scarce resources.
What do Economists study?
How people make decisions, how much they work, what they buy, how much they save, and how they invest their savings. They also study how people interact with one another. They also study analyze 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.
What is an Economy?
Simply a group of people dealing with one another as they go about their lives.
The behavior of the _______ reflects the behavior of the __________ of the economy.
Principle 1: People Face Trade Offs
To get what we like, we usually have to give up something we also like. Example-a student could spend all their time studying for one subject or divide her time and study for two.
"Guns and Butter"
The classic trade off--the more a society spends on national defense to protect, the less it can spend on consumer goods (butter) to raise the standard of living.
Society is getting the maximum benefits from its scarce resources.
Benefits are distributed uniformly among society's members.
__________ refers to the size of the economic pie
__________ refers to how the economic pie is divided into individual slices
When the government tries to cut the economic pie into more equal slices, the pie gets ________
People are likely to make good decisions only if they understand the ________ that are available to them
Principle 2: The Cost of Something is What You Give Up To Get It
Making decisions requires comparing the costs and benefits of alternative courses of action
What you give up to get something. When making any decisions, decision makers should be aware of the opportunity osts that accompany each possible action.
Principle 3: Rational People Think at the Margin
Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities.
A small incremental adjustment to an existing plan of action.
Rational people often make decisions by comparing marginal _______ and marginal ________.
A rational decision maker takes an action if and only if the marginal ______ of the action exceeds the marginal _______ cost.
Principle 4: People Respond to Incentives
Because rational people make decisions by comparing costs and benefits, they respond to incentives
Something that induces a person to act.
_______ are crucial to analyzing how markets work.
A higher price in a market provides an ______ for buyers to consume _____ and an incentive for sellers to produce ______.
incentive, less, more
Increases in the general level of prices
The amount of goods and services produced per unit of labor
The ability of a single person or small group to influence market prices
the impact of one person's actions on the well-being of a bystander. Example is pollution
When the market fails to allocate society's resources efficiently
A group of buyers and sellers. They do not need to be in a single location
To achieve greater ______, we could redistribute income from wealthy to poor, but this reduces _______ to work.
The irregular and largely unpredictable fluctuation in economic activity measured by the production of goods
All Decisions Face Tradeoffs. True or False?
Society Faces the important tradeoff between....?
Efficiency and equality
Principle 5: Trade can make everyone better off
Countries can benefit from trade and specialization
Principle 6: Markets are usually a good way to organize economic activity
In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households.
Principle 7: Governments can sometimes improve market outcomes
Market economies need institutions to enforce property rights so individuals can own and control scarce resources.
What is the Government's most important role?
To enforce property rights.
What are the causes of Market failure?
Externalities and market power
Principle 8: A country's standard of living depends on its ability to produce goods and services
Almost all variation in living standards is attributable to differences in countries' productivity, or, the amount of goods and services produced by each unit of labor input
What is the most important determinant of living?
What does productivity depend on?
Equipment, skills, and technology available to workers
Principle 9: Prices rise when government prints too much money
When the government creates large quantities of the nation's money, the value of the money falls.
Principle 10: Society faces a short-run tradeoff between inflation and unemployment
Over a period of a year or two, many economic policies push inflation and unemployment in opposite directions.
Who said that households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desirable market outcomes.
______ are the instrument with which the invisible hand directs economic activity.
The growth in the quantity of money is the ultimate source of _______.
Society faces a short-run trade-off between ______ and _______.
An economy that relies mainly on market forces to allocate goods and resources and to set prices
The "invisible hand" refers to....
the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
Governments may intervene in a market economy in order to....
Protect property rights, correct a market failure due to externalities, and achieve a more equal distribution of income.