Scarcity
Limited nature of society's resources
Tradeoff
The results of a certain outcome that is made when deciding between two things
What is society's most important tradeoff?
Efficiency vs. Equality
Efficiency
When society gets the most from its scarce resources
Equality
When prosperity is distributed uniformly among members
Opportunity Cost
Whatever must be given up to obtain something. The total cost needed to do something plus the value of your time.
Marginal Changes
Incremental adjustments that are made to an existing plan. Ex. When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue.
Incentive
Something that induces a person to act upon something for a greater reward or punishment. Rational people respond to incentives
Market
A group of buyers and sellers.
Market Economy
It allocates resources through the decentralized decisions of many households and firms as they interact in markets.
Adam Smith's "invisible hand" refers to
The ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
Governments may intervene in a market economy in order to...
Protect property rights, correct a market failure due to externalities, and achieve a more equal distribution of income.
Market Failure
When the market fails to allocate society's resources efficiently.
Causes of Market Failure
Externalities - When the production or consumption of a good affects bystanders.
Market Power - A single buyer or seller has substantial influence on market price.
Productivity
The amount of goods and services produced per unit of labor. It directly depends on the equipment, skills, and technology available to workers.
Inflation
The increase in the general level of prices due to excessive growth in the quantity of money which causes the value of it to fall.