Econ 104 Chapter 1.1-1.2
Explain: Optimal Decisions Are made at the margin
Optimal decision is to continue any activity up to the point where MB=MC (Marginal benefit=marginal cost)
3 key economic concepts
People are rational, people respond to economic incentives, and optimal decisions are made at the margin
Trade offs
because of scarcity, producing more of one good or service means producing less of another good or service.
Marginal Analysis
Analysis that involves comparing marginal benefits and marginal costs.
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.
Explain: People are rational
Consumers/firms use all available information as they act to achieve their goals
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
Which of the following is a correct statement about a mixed economy?
In a mixed economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.
Difference between productive/allocative efficiency?
Productive efficiency occurs when a good or service is produced at the lowest possible cost, Allocative efficiency occurs when production is in accordance with consumer preferences.
opportunity cost
The highest-valued alternative that must be given up to engage in an activity (do not involve actual money payments)
When making choices, what 3 questions do trade-offs force society to answer?
What, how, and who will receive goods and services being produced?
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.
Mixed Economy
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.
equity
fair distribution of economic benefits
difference between centrally planned economy and market economy
government decides how economic resources will be allocated, decisions of households and firms interacting in markets allocate economic resources
Market
group of buyers and sellers of a good/service and institution/arrangement by which they come together to trade
voluntary exchange
situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction
