CHAPTER 1
Optimal decisions are made at the margin
"Optimal decisions" is to continue any activity up to the point where the marginal benefit equals the marginal cost.
Three important ideas about markets
-People are rational -People respond to economic incentives -Optimal decisions are made at the margin
Economic problems that each economy must address
-What goods and services will be produced? -How will the goods and services be produced? -Who will receive the goods and services produced?
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants -which causes us to limit our consumption and make trade offs
Mixed economy
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
Market economy
An economy in which the decisions of households and firms interacting in markets allocate economic resources.
Centrally planned economy
An economy in which the government decides how economic resources will be allocated.
Marginal Analysis
Analysis that involves comparing marginal benefits and marginal costs
Voluntary exchange
Both the buyer and seller of a product are made better by the transaction.
Economists assume that the only reason people take the actions they do in response to the economic incentives.
False, there are other factors.
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
Allocative efficiency
Occurs when production is in accordance with consumer preferences.
People respond to economic incentives
People act in a variety of motives.
People are rational
Rational individuals weigh the benefits and costs of each action, and they choose an option only if the benefits out weigh the costs.
Equity
The fair distribution of economic benefits
Trade-offs
The idea that because of scarcity, producing more of one good or service means producing less of another good or service.
Economists believe that an activity should be continued up to the point where?
The marginal benefit from the activity is equal to the marginal cost
Productive efficiency
When a good or service is produced at the lowest possible cost.
In a market system, how does society decide who will receive the goods and services produced?
Who receives the goods and services produced depends largely on how income is distributed.
Market
a place where buyers and sellers meet to exchange goods and services
What do economist mean by the word marginal?
extra or additional
What goods and services will be produced?
individuals decide the amounts of goods/services they make and is determined by the choices that consumers and people working for the firms and government make. each choice comes with an opportunity cost
Opportunity cost
the loss of profit/benefit of something that must be given up to acquire something else
Economists assume that people are rational in the sense that ______.
they use all available information as they take actions intended to achieve their goals
Efficiency
using resources in such a way as to maximize the (benefits to society) production of goods and services