Ten Principles of Economics – Flashcards

1. People Face Trade Offs 2. The Cost of Something is What You Give Up to Get It 3. Rational People Think at the Margin 4. People Respond to Incentives These are the four principles of ________________.

1. Trade Can Make Everyone Better Off 2. Markets Are Usually a Good Way to Organize Economic Activity 3. Governments Can Sometimes Improve Market Outcomes These are the three principles of _________________.

1. A Country's Standard of Living Depends on its Ability to Produce Goods and Services 2. Prices Rise When the Government Prints Too Much Money 3. Society Faces A Short-Run Trade Off Between Inflation and Unemployment These three principles concern _______________.

Principle Definition: Making decisions requires trading off one goal against another. Example: "guns or butter", "environment or income", "efficiency or equality"

Principle Definition: Making decisions requires comparing the costs and benefits of alternative courses of action. Example: Giving up working for a year to go to college.

Principle Definition: Making decisions requires people who systematically and purposefully do the best they can to achieve an objective. Example: When exams roll around, your decision is not between blowing them off or studying 24 hours a day, but whether to spend an extra hour reviewing instead of watching TV.

Principle Definition: Making decisions by comparing cost and benefits, where incentives induce a person to act. Example: Price of apples rise, people eat fewer apples, while at the same time, apple orchards hire more workers to harvest more apples. A higher price in market provides an incentive for buyers to consume less and an incentive for sellers to produce more.

Principle Definition: People are better off when they trade their skills with someone with a different set of skills. Example: Farmers trade their skill of growing food, with a construction company whose skill is to build houses.

Principle Definition: Market economy allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. Example: "invisible hand"

Principle Definition: The invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. Example: A farmer won't grow food if he expects his crop to be stolen, restaurants won't serve meals unless it is assured that customers will pay before they leave.

Principle Definition: Higher standards of living are associated with higher incomes. Higher incomes are associated with the ability to produce goods and services. Example: Americans have a far larger income than Nigerians, so Americans have more TV sets, more cars, better nutrition, better healthcare, and longer life expectancies.

Principle Definition: When government creates large quantities of the nation's money, the value of the money falls.

Principle Definition: Although a higher level of prices is, in the long run, the primary effect of increasing the quantity of money, the short-run story is more complex and controversial. Example: 1)Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services. 2)Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services. 3)More hiring means lower unemployment.