Economics Review Test 1 - Economics Review Test 1 Chapter 1...

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Economics Review Test 1 Chapter 1 Efficiency - society is getting maximum benefit from its scarce resources Equity -those benefits must be distributed equally among society Opportunity Cost - what you give up to get an item Marginal Cost vs. Marginal Benefit - benefit of producing one unit to the cost of producing Incentives - induce people to act (ex. Gas tax) Trade allows countries to specialize in what they do best -Invisible Hand dictates price in market -Government can sometimes improve market outcomes -can interfere in case of market power or market failure (externality ex. Pollution) Chapter 2 Circular Flow Diagram Households - buy and consume goods/services, own factors of production Firms - produce and sell goods/services, must hire/use factors of production Households spend money in market for goods/service, which turns into revenue for firms. Firms use the revenue to pay for wages and rent, which turns into income for households. PPF- combinations of output that the economy can produce using available factors of production and technology
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