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1st exam - Chapter 1 Scarcity The situation in which...

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Chapter 1 Scarcity- The situation in which unlimited wants exceeded the limited resources available to fulfill those wants. Economics- The study of the choices people make to attain their goals, given their scarce resources Economic Model - A simplified version of reality used to analyze real world economic situations Market- A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade Marginal Analysis- Analysis that involves comparing marginal benefits and marginal costs Trade-off- The idea that because of scarcity, producing more of one good or service means producing less of another good or service Opportunity Costs- The highest valued alternative that must be given up to engage in an activity Centrally planned economy- An economy in which the government decides how economic resources will be allocated (CUBA) Market Economy- An economy in which the decisions of households and firms interacting in markets allocate economic resources Mixed Economy- An economy in which most economic decisions result from the interaction of buyers Productive Efficiency- The situation in which a good or service is produced at the lowest possible cost Allocative Efficiency- A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it Voluntary Exchange- The situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction Equity- the fair distribution of economic benefits Economic Variable- Something measurable that can have different values, such as the wages of software programmers Positive Analysis- Analysis concerned with what is Normative Analysis- Analysis concerned with what ought to be Microeconomics- The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices Macroeconomics- The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth NOTES 3 Key Economic Ideas 1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin -The optimal decision in economics is to continue any activity up to the point where the marginal cost equals the marginal benefit (MC=MB) -Trade offs force society to answer 3 fundamental questions 1. What goods will be produced 2. How will the goods be produced 3. Who will receive the goods produced -High income democracies are all market economies -they have now been changed to be described as mixed market economies as a result of the government intervention now prevalent in their economies -China recently switched from centrally planned to more of a mixed economy -There is often a tradeoff between efficiency and equity -often confronted by governments in regulation of goods
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Macro vs. Micro
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