Econ 103_ Final.pdf - Midterm 1 Chapter 1: Ten Principles...

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Midterm 1Chapter 1: Ten Principles of EconomicsHow people make decisionsPrinciple 1: People Face Trade-offsGuns and Butter: the more a society spends on national defense, the less it canspend on consumer goods to raise the standard of living at homeEfficiency and EqualityEfficiency: society is getting the maximum benefits from its scarceresourcesEquality: those benefits are distributed uniformly among society’smembersEfficiency refers to the size of the economic pie, and equality refers tohow the pie is divided into individual slicesPolicies aimed at equalizing the distribution of economic well-being, individualincome tax--achieve greater equality, reduce efficiencyWhen the government tries to cut economic pie into more equal slices, the piegets smallerPrinciple 2: The cost of something is what you give up to get itMaking decisions requires comparing the costs and benefits of alternative coursesof actionOpportunity Cost:what you give up to get the itemPrinciple 3: Rational people think at the marginRational people:systematically and purposefully do the best they can to achievetheir objectives, given the available opportunitiesMarginal change:describe a small incremental adjustment to an existing plan ofactionPerson’s willingness to pay for a good is based on the marginal benefit that anextra unit of the good would yieldMB > MCPrinciple 4: People respond to incentivesIncentive:something (such as the prospect of a punishment or reward) thatinduces a person to act“People respond to incentives. The rest is commentary”Higher price = people buy lessPolicymakers: tax on gas encourages people to drive smaller, more fuel efficientcarsHow people interactPrinciple 5: Trade can make everyone better off
Principle 6: Markets are usually a good way to organize economic activityMarket Economy:decisions of a central planner are replaced by the decisions ofmillions of firms and householdsSmith: participants in the economy are motivated by self-interest & invisible handof the marketplace guides this self-interest into promoting general economicwell-beingPrinciple 7: Governments can sometimes improve market outcomesProperty rights:individuals can own and control scarce resourcesGov intervenes to promote efficiency or equalityMarket failure:situation in which the market on its own fails to produce anefficient allocation of resourcesExternality:impact of one person’s actions on the well-being of a bystander(possible cause of market failure) example: pollutionMarket power:ability of a single person or firm to unduly influence marketprices (possible cause of market failure)How the economy as a whole worksPrinciple 8: A country’s standard of living depends on its ability to produce goods andservicesProductivity:amount of goods and services produced by each unit of labor input

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Term
Spring
Professor
Petry

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