Micro Chapter 1

Market economy (2)

1- an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services 2-the decisions of a central planner are replaced by the decisions of millions of firms and households

Rational people (2)

1- people who systematically and purposefully do the best they can to achieve their objectives 2-a rational decision maker takes an action only if the marginal benefit of the action exceeds the marginal cost

Two reasons for government intervention (2)

1- to promote efficiency 2- to promot equality

Efficiency v. Equality (3)

1-Efficiency: means that society is getting the maximum benefits from its scarce resources (size of pie) 2-equality: means that those benefits are distributed uniformly among society's members (how pie is divided) 3-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. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller

Market failure (2)

1-a situation in which a market left on its own fails to allocate resources efficiently 2-one possible cause of market failure is externality, which is the impact of one person's actions on the well-being of a bystander

Incentive (2)

1-an incentive is something (such as a prospect of a punishment or reward) that induces a person to act 2-because rational people make decisions by comparing costs and benefits, they respond to incentives

Inflation (2)

1-an increase in the overall level of prices in the economy 2-growth in the quantity of money causes inflation

Marginal change (3)

1-economists use the term marginal change to describe a small incremental adjustment to the existing plan of action 2-marginal changes are adjustments around the edges of what you are doing. 3-Rational people often make decisions by comparing marginal benefits and marginal costs

Business cycle (1)

1-fluctuations in economic activity, such as employment and production

Invisible hand (3)

1-prices are the instrument with which the invisible hand directs economic activity 2-prices adjust to guide individual buyers and sellers to reach outcomes that maximize the well-being of society 3-the invisible hand can work its magic only if the government enforces the rules and institutions that are key to a market economy (property rights)

Market power (1)

1-the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Property rights (2)

1-the ability of an individual to own and exercise control over scarce resources 2-market economies need institutions to enforce property rights so individuals can own and control scarce resources

Scarcity (2)

1-the limited nature of society's resources 2-means that society has limited resources and therefore cannot produce all the goods and services people wish to have

Productivity (3)

1-the quantity of goods and services produced from each unit of labor input 2-almost all variation in living standards is attributable to differences in countries' productivity 3-similarly, the growth rate of a nation's productivity determines the growth rate of its average income

Economics (1)

1-the study of how society manages its scarce resources

Opportunity Cost (1)

1-whatever must be given up to obtain something 2-explicit costs plus implicit costs