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econ - Chapter 1 Economics study of choices people make to...

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Chapter 1 Economics – study of choices people make to attain their goals, given their scarce resources. Marginal Analysis – analysis that involves comparing marginal benefits and marginal cost. Opportunity Cost – the highest valued alternative that must be given up to engage in an activity. 3 key Economic Ideas 1. People are Rational – economists, assume that consumers and firms use all available information as they act to achieve their goals. 2. People respond to economic incentives – 3. Optimal Decisions are made at the margin. Continue until marginal benefit equals marginal cost. Trade Offs - the idea that because of scarcity, producing more of one good or service means producing less of another good or service. Trade Offs force society to make choices: What goods and services will be produced? How will the goods and services be produced ? Who will receive the goods and services produced? Centrally planned economy – An economy in which the government decides how economic resources will be allocated 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 and sellers in markets but in which the government plays a significant role in the allocation of resources. Efficiency and Equity Productive efficiency – when a good or service is produced at the lowest possible cost Allocative efficiency- when production is in accordance with consumer preferences Equity – the fair distribution of economic benefits - Tax the rich higher. Reduces Higher Incomes and Raises Lower and promotes equity but reduces efficiency.
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