Exam 1 notes econ - Chapter 1 Ten Principles of Economics Economics the study of how society manages its scarce resources The ten principles of

Exam 1 notes econ - Chapter 1 Ten Principles of Economics...

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Chapter 1: Ten Principles of Economics Economics: the study of how society manages its scarce resources The ten principles of economics 1) People Face Tradeoffs a. The more society spends on defense, the less it can spend on consumer goods b. Efficiency: society getting the most it can from its scarce resources c. Equality: Distributing economic prosperity uniformly among the members of society 2) The Cost of Something is What you Give up to get it a. Opportunity Cost: what you give up to get an item 3) Rational People Think at the margin a. Rational People: systematically and purposefully do the best they can to achieve their objectives b. Marginal change: a small incremental adjustment to an existing plan of actions c. Rational people make decision by comparing the marginal benefits to marginal costs 4) People Respond to Incentives a. Incentive: something that induces a person to act 5) Trade can make everyone better off a. Trade allows each person to specialize in the activities they do best. BY trading, people can buy a greater variety of goods at a lower cost 6) Markets are usually a good way to organize Economic Activity a. Market economy : an economy that allocates resources through the decisions of many households as they interact in markets for goods and services 7) Governments can sometimes improve market outcomes a. Government enforces rules and maintains institutions b. Property rights: the ability of an individual to own and exercise control over scarce resources c. Market Failure: a situation in which a market left on its own fails to allocate resources efficiently i. Externality: the impact of one person’s actions on the wellbeing of a bystander ii. Market power: the ability of a single economic actor to have a substantial influence on market prices 8) A country’s standard of living depends on its ability to produce goods and services a. Productivity: the quantity of goods and services produced from each unit if labor input 9) Prices rise when the government prints too much money a. Inflation: an increase in the overall level of prices in the economy 10) Society Faces a Short-Run Trade-off between Inflation and Unemployment a. Increasing the amount of money in the economy stimulates the overall level of spending and thus demand for goods and services b. Hire demand over time causes firms to raise prices and hire more workers c. Business cycle : fluctuations in economic activity, such as employment and production Chapter 2: Thinking Like an Economist Economic Models
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Circular Flow Diagram: a visual model of the economy that shows how dollars flow through markets among households and firms Revenue Spending Production Possibilities Frontier Model: a graph that shows the combinations of output that the economy can possibly produce given the available factors of productions and technology o Points outside the frontier are not feasible o The slope measures the opportunity cost of a car in terms of computers o Points on the line are efficient o
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