Econ 101: Chapter 1

How does one persons spending affect the economy?

Because on persons spending is another persons income, a chain reaction of changes in spending behavior tends to have repercussions that spread through the economy

What are gains from trade?

By dividing tasks and trading, people can get more of what they want through trade than they could if they tried to be self-sufficient Gains from trade arise from specialization

What are the 4 Principles of individual choice?

-People must make choices because resources are scarce -The opportunity cost of an item-what you must give up in order to get it-is its true cost -"How Much" Decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less -People usually respond to incentives, exploiting opportunities to make themselves better off

What are the set of basic principles that apply to three levels of economic activity, that all economic analysis is based on?

-The study of how individuals make choices -Study how theses choices that individuals make ineract with each other -Study how the economy functions overall

What are The 5 principles of the interaction of individual choices?

-There are gains from trade -Because people respond to incentives, markets move towards equilibrium. -Resources should be used as effectively as possible to achieve society's goals -Because people usually exploit gains from trade, markets usually lead to efficiency -When markets don't achieve efficiency, government intervention can improve society's welfare

What is a Market Economy?

A market economy is an economy where decisions about production and consumption are made by individual producers and consumers

What makes a market inefficient?

A market is inefficient when there are unexploited opportunities for people to be made better off without making others worse off

What is a recession?

A recession is a downturn in the economy Shortfalls in spending are responsible for most (though not all) recessions

What is an economy?

An economy is a system for coordinating society's productive activites

What is an Efficient economy?

An economy is efficient if it takes all opportunities to make some people better off without making other people worse off are taken Economists say that an economy's resources are used efficiently when they are used in a way that has fully exploited all opportunities to make every one better off Resources should be used as efficiently as possible to achieve society's goals When an economy is efficient, it is producing the maximum gains from trade possible given the resources available Except for certain well-defined situations, markets are normally efficient. When markets fail to achieve efficiency, government intervention can improve society's welfare by changing how society's resources are used

What are Marginal Decisions?

Decisions about whether to do a bit more or a bit less of an activity

What is economics?

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

What are economies limited by?

Economies are limited by their supplies of human and natural resources

What is Equity?

Equity means that everyone gets his or her fair share. Since people can disagree about what is "fair", equity isn't a well defined concept as efficiency While desirable in an economy, policies that promote equity often come at a cost of decreased efficiency in the economy (and vice versa) Trade off between making life "fairer" and making sure that all opportunities to make people better off have been fully exploited

What are the three principles in which markets fail?

Individual actions have side effect that are not properly taken into account by the market Ex: An action that causes air pollution One party prevent mutually beneficial trades from occurring in an attempt to capture a greater share of the resources for itself Ex: a drug company making the price of the drug higher than the cost to make it, making it unaffordable for some people who would benefit from it Some goods for their very nature, are unsuited for efficient management by markets Ex: air traffic control

What is microeconomics?

It is the branch of economics that studies how people make decisions and how these decisions interact

What is the overall choice?

It is the sum of individual decisions

What does the invisible hand refer to?

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

What are the Principles of Economy wide interactions?

One persons spending is another persons income Changes in spending behavior have repercussions that spread throughout the economy When spending is to low, the result is a recession When spending is to high, it causes inflation Overall spending sometimes gets out of line with the economies productive capacity Government policies can change spending

What are ways that society makes choices?

One way that society makes choices is by allowing them to emerge as a result of many individual choices (which is what happens in a market economy)

What is inflation?

Spending in excess of the economy's production capacity It occurs when the amount of people who want to purchase a good outstrips the supply, producers can raise their prices and still find willing customers

What do the incentives that are built into the market do?

The incentives that are built into the market economy ensure that resources are usually put to good use and that opportunities to make people better off are not wasted

What is Opportunity cost (of an item)?

The opportunity cost (of an item) is what you must give up in order to get it-it is the true cost (of an item) because you are living among limited alternatives All costs are opportunity costs, because every choice you make, means forgoing some other alternative Monetary costs are sometimes a good indicator of opportunity cost but not always

What is the opportunity cost (of a choice)?

The opportunity cost of a choice is what you forgo by not choosing your next best alternative

What is Marginal analysis?

The study of marginal decisions Marginal analysis plays a key role in economics because it is the key to deciding "how much" of an activity to do

Is money always a good indication opportunity cost?

Usually it is but not always Ex: Cost of attending college. Even if college was free, most students, would have a job. Thus, going to college students forego the income they could have earned if they worked instead This means that the opportunity cost is what you pay (in tuition, housing, and other expenses), as well as the forgone income you would have earned in a job

What is market failure?

When an individual pursuit of self-interest leads to bad results for society as a whole, there is market failure Market outcome is inefficient

What is Equilibrium?

an economic situation is in equilibrium when no individual would be better off doing something different Markets usually move towards equilibrium because people exploit gains from trade

What is a resource?

anything that can be used to produce something else Resources are usually: Land, labor, capital, human capital(educational achievements and skill of workers)

What is one way society makes choices?

by allowing the choices to emerge as the result of many individual choices

What is Individual Choice?

decisions by an individual about what to do and what not to do it is the basis of economics-if it doesn't involve choice, then it isn't economics The reason that choice must be made is that resources are scarce. Individuals are limited in their choices by money and time

What is specialization?

each person specializes in the task that he or she is good at performing It is the source of all gains from trade This principle can be applied to economy as a whole because: The economy as a whole can produce more when each person specializes in a task and trades with others As long as individuals know that they can find what they are looking for in a market, they are willing to forego self-sufficiency, and to specialize

What is trade?

exchanging goods and services for other goods and services

What is Interaction?

interaction of choices-my choices affect your choices, and vice versa-is a feature of most economic situations. The results of this interaction are often quite different from what the individuals intend Interaction occurs via trade between individuals each individual's opportunities, and hence choices, depend to a large extent on the choices made by other people

What is an incentive?

is anything that offers rewards to people who change their behavior It is an opportunity to make yourself better off Individuals will continue to exploit these opportunity's until they have been fully exhausted Economists tend to be skeptical of any attempt to change people's behavior that doesn't change their incentives

What does it mean to be scare?

not enough resources are available to satisfy all the various ways a society want to use them Ex: natural resources, human resources(labor, skill, and intelligence)

What is a Trade-off?

when you compare the costs with the benefits of doing a bit more or a bit less of something (these are done at the margin) You compare the costs and benefits of doing something else Ex: studying for chemistry and economics. Do you study econ or chem more? Here you would compare the costs and benefit of either studying econ more or studying chem more