ME Ch. 1

True or False? Fish and other wildlife killed by pollution from an oil spill from a deep-water drilling rig is an example of market failure caused by one party preventing mutually beneficial trade in order to capture more profits.

False - its market failure but b/c the market is not taking the side effects of an action into account.

Economics

The study of how to allocate limited resources to satisfy unlimited wants, AND The study of the choices people make to attain their goals, given their scarce resources

COMMAND ECONOMY

a central authority makes decisions about production and consumption.

Adam Smith

Father of modern economics, argued for free markets as the coordinating mechanism between buyers and sellers.

The "Invisible Hand":

the way in which the individual pursuit of self-interest can lead to good results for society as a whole

True or False? In order to achieve efficiency, markets always need to be heavily regulated.

False - People acting in their own self-interest in markets often leads to efficiency. Sometimes market outcomes can be improved by government involvement, but not always.

True or False? Government funding of scientific research is an example of market failure caused when one party prevents mutually beneficial trades in order to capture more resources.

False - Government funding of scientific research is an example of market failure because some goods are not suited for management through markets.

True or False? An increase in the amount of money in circulation will increase spending.

True

True or False? One of the causes of a recession is when the economy is capable of producing more goods and services than people want to buy.

True

True or False? The government's provision of disease control through the Centers for Disease Control is an example of government intervention in a case of market failure because some goods are not suited for management through markets.

True - Goods like disease control are suitable for management through markets because it is difficult to make individuals pay for the benefits that result from disease control.

MARKET ECONOMY

an economy in which decisions about production and consumption are made by individual producers and consumers.

If the government wants to increase spending, an appropriate macroeconomic policy is

an increase in government spending

If the government wants to decrease spending, an appropriate macroeconomic policy is

an increase in taxes.

Markets usually lead to efficient outcomes because

individuals usually respond to economic incentives to further their own self -interest in markets.

Too much spending in the economy leads to

inflation

Efficiency means that

it is impossible to make someone better off without making someone else worse off.

Scarcity of resources

means that there are not enough resources available to satisfy all the ways that society wants to use them.

Health insurance companies that charge so much for health insurance premiums that many people cannot afford insurance is an example of market failure caused by

one party preventing mutually beneficial trade in order to capture more profits.

ECONOMY

system of coordinating a society's productive activities

ECONOMICS def

the social science that studies the production, distribution, and consumption of goods and services

Market failure

when Individual pursuit of self interest leads to bad results for the broader society, like pollution