Econ Chapter 1
What does society do?
Also makes many decisions and allocates resources
Scarcity
The limited nature of society's resources
What does a household do?
Makes a lot of decisions and allocates resources
Denise decides to spend 3 hours working overtime rather than watching a video with her friends. She earns $10 an hour. Her opportunity cost of working is..?
The enjoyment she would have received had she watched that video
What does economy mean?
"One who manages a household"
Principle 2: The Cost Of Something Is What You Give Up To Get It
- People face trade-offs (comparing cost with benefits) - Opportunity Cost
Principle 3: Rational People Think At The Margin
- Rational people - Marginal changes, benefits, and costs - Rational decision maker
What do economists study?
1. How people make decisions 2. How people interact with one another (price and quantity decided by buyer and seller) 3. Analyze forces and trends that affect the economy as a whole
Property rights
Ability of an individual to own and exercise control over scarce resources
Describe a Market (Free) Economy
Allocates resources through decentralized decisions of many firms and households, as they interact in markets for goods and services, and are guided by prices and self interest
How does one " promote equality"?
Avoid disparities in economic well being
How does one "promote efficiency"?
Avoid market failure
Marginal Benefits & Costs
Benefits - Additional benefits Costs - Additional costs
Principle 6: Markets Are Usually A Good Way To Organize Economic Activity
Central vs Free economy
Principle 9: Prices rise when the government prints too much money
Due to inflation --> An increase in the overall level of prices in the economy > If everyone has a lot of $, prices for items go up and it won't matter anymore
Principle 4: People Respond To Incentives
Ex: Apple prices increase, which leaves an incentive for buyer and seller; bus drivers in Chile are always on time b/c they are payed by # of people riding the bus
A rational decision maker will only take action if...
Marginal Benefits > Marginal Costs
Describe Central Planning
Government officials allocate the economy's scarce resources - already have a set standard in place
What you give up to obtain an item is called your...?
Opportunity cost
Principle 1: People Face Trade-offs
People face trade-offs... - Trade off one goal against another -Efficiency/Equality ex: student deciding b/w hanging w/ friends and doing schoolwork *Deciding what's more important
The phrase "no such thing as a free lunch" means..?
People must face trade-offs
Describe a rational person.
People who systematically and purposefully do the best they can to achieve their objectives
Positive vs Normative Statements
Positive - Attempt to describe the world as it is; descriptive; confirm or refute by examining evidence Normative - Attempt to prescribe how the world SHOULD be; an opinion
When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing..?
Scarcity
Market Failure/ Causes?
Situation in which the market on it's own fails to produce an efficient allocation of resources Causes? Market power and externality
Marginal Changes
Small incremental adjustments to a plan of action Ex: 1 hr of studying vs taking a nap
Efficiency means that...?
Society is getting the maximum benefits from it's scarce resources
Incentive
Something that induces a person to act --> rational people make decisions by comparing costs and benefits, so they respond to incentives
What is market power?
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices (ex: monopoly)
In most societies, resources are allocated by...?
The combined actions of millions of households and firms
What is externality?
The impact of one person's actions on the well being of a bystander (ex: pollution, smoking, accidents by drunk drivers, etc.) --> can be positive or negative
A rational decision maker takes action only if...?
The marginal benefit is greater than the marginal cost
Productivity
The quantity of goods and services produced from each unit of labor input
Macroeconomics
The study f economy-wide phenomena - including inflation, unemployment and economic growth
Microeconomics
The study of how households and firms make decisions and how they interact in markets
Economics
The study of how society manages its scarce resources
Principle 5: Trade Can Make Everyone Better Off
Trade --> allows each person to socialize in the activities he/she does best and enjoy a greater variety of goods and services
High school athletes who skip college to become professional athletes...
Understand that the opportunity cost of attending college is really high
Principle 7: Governments can sometimes improve market outcomes
We need the gov't. to enforce rules and maintain institutions
Opportunity Cost
Whatever must be given up to obtain one item Ex: Adrian Peterson college vs football career
