Economics 151

Scarcity

The limited nature of society's resources.

Economics

The study of how society manages it's scarce resources.

Efficiency

The property of society getting the most it can from its scarce resources.

Equality

The property of distributing economic prosperity uniformly among the members of society.

Opportunity Cost

Whatever must be given up to obtain some item.

Rational People

People who systematically and purposefully do the best they can to achieve their objectives.

Marginal Change

A small incremental adjustment to a plan of action.

Incentive

something that induces a person to act.

Market Economy

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in market in markets for goods and services.

Property Rights

The ability of an individual to own and exercise control over scarce resources.

Market Failure

A situation in which a market left on its own fails to allocate resources efficiently.

Externality

The impact of one person's actions on the well-being of a bystander.

Market Power

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

Productivity

The quantity of goods and services produced from each unit of labor input.

Inflation

An increase in the overall level of prices in the economy.

Business Cycle

Fluctuations in economic activity, such as employment and production.

Circular-Flow Diagram

A visual model of the economy that shows how dollar flow through markets among households and firms.

Production Possibilities Frontier

A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production terminology.

Microeconomics

The study of how households and firms make decisions and how they interact in markets.

Macroeconomics

The study of economy wide phenomena, including inflation, unemployment, and economic growth.

Positive Statements

Claims that attempt to describe the world as it is.

Normative Statements

Claims that attempt to prescribe how the world should be.

Absolute Advantage

The ability to produce a good using fewer inputs than another producer.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Imports

Goods produced abroad and sold domestically.

Exports

Goods produced domestically and sold abroad.

Economics

The study of how society manages its scarce resources.

What do economists study?

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What is the First Principle of Economics?

People Face Trade Offs.
-Trade off one good against another.
-Ex: Clean environment vs. high levels of income.
-Efficiency vs. Equality.

What is the Second Principle of Economics?

The Cost of Something is What you Give Up To Get It.
-Trade offs and Opportunity cost

What is the Third Principle of Economics?

Rational People think at the Margin
-Marginal (additional) Benefits and/or costs
-Rational decision maker: Take action only if the Marginal benefits > Marginal costs.

What is the Fourth Principle of Economics?

People Respond to Incentives
-Higher Prices --> Buyers consume less, Sellers produce more.
-Rise of gas prices --> Incentive to conserve gas.

What is the Fifth Principle of Economics?

Trade Can Make Everyone Better Off
-Trade: Allows for each person to specialize in the activities one does best.

What is the Sixth Principle of Economics?

Markets are usually a Good Way to Organize Economic Activity.
-Market Economy: Allocates resources

What is the Seventh Principle of Economics?

Governments Can Sometimes Improve Market Outcomes
-Need Government: Enforce rules, maintain institutions, promote efficiency and equality.

What is the Eight Principle of Economics?

A Country's Standard of Living Depends on its Ability to Produce Goods and Services
-Higher Productivity, higher living standards

What is the Ninth Principle of Economics?

Prices Rise When the Government Prints Too Much Money
-Inflation

What it the Tenth Principle of Economics?

Society Faces a Short-Run Trade Off Between Inflation and Unemployment
-Monetary injections stimulates level of spending

David Ricardo

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