Econ Chapter 1

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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


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