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