Chapter 1: Ten Principles of Economics
an economy
a group of people dealing with one another as they go about their lives
market failure
a situation in which a market left on its own fails to allocate resources efficiently to refer to a situation in which the market on its own fails to produce an efficient allocation of resources one possible cause of market failure is an externality
marginal change
a small incremental adjustment to a plan of action economists use the term marginal change to describe a small incremental adjustment to an existing plan of action. keep in mind margin means "edge" so marginal changes are adjustments around the edges of what you are doing.
Society faces a short term trade off between inflation and unemployment
although a higher level of prices is, in the long run, the primary eddect of increasing the quantity of money, the short run story is more complex and controversial. the short run effects of monetary injections as: -stimulates overall level of spending and thus the demands for goods and services -higher demand may overtime cause firms to raise their prices, but in the mean tie, it also encourages them to hire more workers and produce a larger quantity of goods and services -more hiring means lower unemployment
market economy
an economy that allocates resources throughout the decentralized decisions of many firms and households as they interact in markets for goods and services in a ..... the decisions of of a central planner are replaced by the decisions of millions of firms and households. in a ..... no one is looking out for the economic well being of society as a whole. a .... rewards people according to their ability to produce things that other people are willing to pay for (chess vs basketball)
inflation
an increase in the overall level of prices in the economy broken window fallacy understand the non-intuitive reality that real progress comes from job destruction
buisness cycle
fluctuations in economic activity, such as employment and production the irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed.
Adam Smith's invisible hand refers to
...
Governments may intervene in a market economy in order to...
...
If a nation has high and persistent inflation, the most likely explanation is
...
a marginal change is one that
...
economics is best defined as the study of
...
explain the two main causes of market failure and give an example of each.
...
give three examples of important trade offs that you face in your life
...
how are inflation and unemployment related in the short run?
...
list and explain the three principles that describe how the economy as a whole works
...
what does the "invisible hand" of the marketplace do?
...
what is inflation and what causes it?
...
what items would you include to figure out the opportunity code of a vacation to Disneyworld ?
...
why is productivity important?
...
why isn't trade among countries like a game with some winners and some losers
...
why should policymakers think about incentives
...
your opportunity code of going to a movie is
...
Smith's reasons for government
The invisible hand is powerful, but it is not omnipotent. There are two broad reasons for a government to intervene in the economy and change the allocation of resources that people would choose on their own: to promote efficiency or to promote equality. That is, most policies aim either to enlarge the economic pie or to change how the pie is divided.
Adam Smith
made the most famous observation in all of economics: households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desirable market outcomes. prices are the instrument with which the invisible hand directs economic activity. in any market, buyers look at the price when determining how much to demand, and sellers look at the price when deciding how much to supply. as a result of the decisions that buyers and sellers make, market prices reflect both the value of a good to society and the cost to society of making the good. Smith's great insigne was that prices adjust to guide these individual buyers and sellers to reach outcomes that, in many cases, maximize the well being of society as a whole. Smith's insight has an important corollary: when a government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand's ability to coordinate the decisions of the households and firms that make up an economy. This corollary explains why taxes adversely the allocation of resource: they distort prices and thus the decisions of households and firms. also explains failure of communism.
Trade offs
making decisions requires trading off one goal for another. trade offs in society guns and butter environment vs high income efficiency vs equality
efficiency
means that society is getting maximum benefits from its scarce resource. the property of society getting the most it can from its scarce resource
equality
means that those benefits are distributed uniformly among society's members. the property of distributing economic prosperity uniformly among the members of society. when the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods and services.
rational people
people who systematically and purposefully do the best they can to achieve their objectives, given the available opportunities
water is necessary for life. Is the marginal benefit of a glass of water large or small?
small
incentive
something that induces a person to act because rational people make decisions by comparing cows and benefits, they resound to incentives. -a higher price in a market provides an incentive for buyers to consume less and an incentive for sellers to produce more. -when policy makers fail to consider how their policies affect incentives, they often end up with unintended consequences
market power
the ability of a single economic actor (or a small group of actors) to have a substantial influence on market prices. which refers to the ability of a single person or firm (or a small group) to unduly influence market prices.
property rights
the ability of an individual to own and exercise control over scarce resources - so individuals can own and control scarce resources we all rely on government- provided police and courts to enforce our rights over the things we produce- and the invisible hand counts on our ability to enforce our rights
externality
the impact of one person's actions on the well being of a by standard which is the impact of one person's actions on the well being of a bystander the classic example of an externality is pollution
scarcity
the limited nature of society's resources. means that society has limited resources and therefore cannot produce all the goods and services people wish to have.
productivity
the quantity of goods and services produced from each unit of labor input that is, the amount of goods and services produced by each unit of labor input. the relationship between productivity and living standards also has profound implications for public policy. When thinking about how any policy will affect living standards, the key question is how it will affect our ability to produce goods and services. To boost living standards, policymakers need to raise productivity by ensuring tat workers are well educated, had the tools they need to produce goods and services, and have access to the best available technology.
economics
the study of how society manages its scarce resources economists study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. they also study how people interact with one another. economists also analyze forces and trends that affect the economy as a whole, including growth and average income, the fraction of the population that cannot find work, and the rate at which prices are rising.
trade
trade allows countries to specialize in what they do best and to enjoy greater variety of goods and services
opportunity cost
whatever must be given up to obtain some item