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econmidtermterms - Ch 1 Economics The study of wealth...

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Ch. 1: Economics: The study of wealth Scarcity: The goods available are too few to satisfy individual’s desires Marginal Cost: Additional cost to you over and above the costs you have already incurred (cost of 1 more unit) Sunk costs: Costs that have already been incurred and cannot be recovered Marginal Benefit : Additional benefit above what you’ve already derived (benefit of one more unit) Economic decision rule : If MB exceeds MC, do it If MC exceeds MB, don’t do it Opportunity Cost : Benefit forgone by undertaking an activity rather than the next-best activity (cost of not doing second-best activity) Economic forces: Necessary economic reactions to scarcity Market force : Economic force given relatively free reign by society to work through the market (minimal gov’t action) Invisible hand : Price mechanism, the rise and fall of prices that guides our actions in a market (push towards equilibrium) Efficiency : Achieving a goal as cheaply as possible Invisible Hand Theory : a market economy, through the price mechanism, will tend to allocate resources efficiently Microeconomics : Study of individual choice, and how that choice is influenced by economic forces Macroeconomics : Study of the economy as a whole Economic policies : Actions (or inactions) taken by the government to influence economic actions. Positive Economics : Study of what is, and how the economy works Normative Economics : The study of what the goals of the economy should be Art of Economics : Application of the knowledge learned in positive economics to the achievement of the goals one has determined in normative economics Ch. 2: Production Possibility Table : A table that lists a choice’s opportunity costs by summarizing what alternative outputs you can achieve with your inputs. Output : A result of an activity Input : What you put into a production process to achieve an output 1 and 0 : What we are playing to be Production Possibility Curve (PPC ): A curve measuring the maximum combination of outputs that can be obtained from a given number of inputs. Displays opportunity cost through its shape. Anything on the line is considered efficient, anything inside the curve is inefficient, anything outside the curve is not possible, ceteris paribus Comparative Advantage : The ability to be better suited to the production of one good than to the production of another good
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Principle of increasing marginal opportunity cost : In order to get one more of something, one must give up ever-increasing quantities of something else. Opportunity costs increase as more and more of the good is produced. Productive efficiency : Achieving as much output as possible from a given amount of inputs or resources Inefficiency : Getting less output from inputs that, if devoted to some other activity, would produce more output Laissez-faire : An economic policy of leaving coordination of individuals’ actions to the market.
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