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ECON EXAM 1

Terms in this set (138)

The Ten Principles of Economics
1- People Face Trade-Offs - giving up something we like to get something else we also like
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 Government Prints Too Much Money
10- Society Faces a Short-Run Trade-off between Inflation and Unemployment
Scarcity
the limited nature of society's resources
Economics
the study of how society manages it scarce resources
A trade-off society faces is between EFFICIENCY and EQUALITY. What do these terms mean?
Efficiency: the property of society getting the most it can from its scarce resources

Equality: the property of distributing economic prosperity uniformly among the members of society
Opportunity Cost should be considered when calculating what the cost of something actually is. What is the opportunity cost?
Whatever must be given up to obtain some item
When considering the 3rd principle of Economics, we must define what 'rational people' means.
They are people who systematically and purposefully do the best they can to achieve their objectives
Marginal change is what?
a small incremental change/adjustment to a plan of action
What is an incentive?
something that induces a person to act, such as a punishment or a reward
What is a market economy?
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
What is one very important role of the government?
to enforce property rights as people are less inclined to work, produce, invest, or purchase if there is a large risk that their property will be stolen
Property Rights
the ability of an individual to own and exercise control over scarce resources
Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. Countries can also benefit from trade and specialization for what reasons?
-get a better price abroad for goods they produce
-buy other goods more cheaply from abroad than could be produced at home
"Organizing Economic Activity" means determining what?
-what goods to produce
-how to produce them
-how much of each to produce
-who gets them
Adam Smith, The Wealth of Nations (1776) said what?



what does it mean?
...."led by the invisible hand"......



means that the invisible hand works thru the price system:
-interaction of buyers and sellers determines prices
-each price reflects the goods value to buyers and the cost of producing the good
-prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being
Market Failure
a situation in which a market left on its own fails to allocate resources efficiently
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