Microeconomics Chapters 1 and 2 – Flashcards

a system for coordinating society's productive activities is responsible to create the goods and services and deliver them to the people they want to; the extent to which this occurs determines the success of the economic practices

the study of economies, at the level both of individuals and of society as a whole focuses on the success of economies to provide the goods and services that the people demand

an economy in which decisions about production and consumption are made by individual producers and consumers decentralized control, which allows for the individual consumer and the firms to make their own economic choices this is what the U.S. has

an economy in which their is a central authority making decisions about production and consumption famous for long lines at shops occurred in Soviet Union consumers and producers face scarcity (not enough resources to produce what they needed to, not enough demand, hard to gain access to goods)

refers to the way in which the individual pursuit of self interest can lead to good results for society as a whole idea originated in "The Wealth of Nations" by Adam Smith America's market economy wouldn't be successful without this occurring, as there would be no group/community unity

the branch of economics that studies how people make decisions and how these decisions interact focuses on the validity of the invisible hand, and how individuals pursuing their own interests often do promote the interests of society as a whole

occurs when the individual pursuit of self-interest leads to bad results for society as a whole economic analysis can be used to diagnose cases of market failure and devise solutions to these problems example: air and water pollution three principle reasons: -individual actions have side effects that are not properly taken into account by market -one party prevents mutually beneficial trades from occurring in attempt to capture a greater share of resources for itself -some goods, by nature, are unsuited for efficient management by markets

a downturn in the economy the economy does not always run smoothly, it experiences fluctuations U.S. economy experienced this in 2001

the branch of economics that is concerned with overall ups and downs in the economy main concern = recessions in this branch, economics explain recessions and how government policies can be used to minimize the damage of economic fluctuation

the growing ability of the economy to produce goods and services prompts central questions in the study of economics - why does the economy grow over time? why does economic growth occur faster in some locations and times than others? this process is a good thing, benefits the people

the decision by an individual of what to do, which necessarily involves a decision of what not to do every question in economics at the most basic level involves this all economic activities involve this four basic principles: -resources are scarce -the real cost of something is what you must give up to get it -"how much" is a decision at the margin -people usually exploit opportunities to make themselves better off

anything that can be used to produce something else land, labor, capital (machinery, buildings, man made productive assets), human capital scarcity of these things require individuals to make choices and effect the economy

the quantity of available resources isn't large enough to satisfy all productive users natural resources that come from the physical environment, human resources (labor, skill, intelligence), clean air and water it is the basic problem of economics - forces people/communities to make decisions and choices

the real cost of an item: what you must give up in order to get it central to the study of economics as it includes ALL COSTS and helps economists to understand individual choice

when you compare the costs with the benefits of doing something central to economics due to the fact that the scarcity of resources (time) require you to make decisions which result in opportunity costs as well as benefits

decisions about whether to do a bit more or a bit less of an activity important to economics as it answered the questions of what to do with your next hour or what to do with your next dollar

the study of decisions about whether to do a little more or a little less of an activity plays a central role in economics because it is the key to deciding "how much" of an activity to do

anything that offers rewards to people who change their behavior economists are skeptical of any attempt to change people's behavior that doesn't change their incentives in an economic situation, individuals will exploit opportunities to make themselves better off (basis of all predictions by economists about individual behavior)

my choices affect your choices, and vice versa a feature of most economic situations results of this interactions are often quite different from what the individuals intend in a market economy, there is no head coordinator so the decisions are left to the individuals, but each individual's choices depend not the choices made by other people 1. there are gains from trade 2. markets move towards equilibrium 3. resources should be used as efficiently as possible to achieve society's goals 4. markets usually lead to efficiency 5. when market's don't achieve efficiency, government intervention can improve society's welfare

individuals in a market economy provide goods and services to others and receive goods and services in return important to economic because it offers many gains (two people can get more of what they want than they could each produce themselves

people get more of what they want through trade than they could i they tried to be self-sufficient market economy is based on trade and the fact that it benefits and connects each member of the population in a more sufficient, specialized way

causes an increase in output due to the fact that each person specializes in the task he or she is good at performing the economy, as a whole, can produce more when each person specializes in a task and trades with others

an economic situation in which no individual would be better off doing something different markets reach this state through changes in prices (rise and fall until no opportunities for individuals to make themselves better off remain) central to the practice of economics because it allows us to depend on markets because they work in a predictable way towards equilibrium (can trust markets to supply us with the essentials of life)

when an economy takes all opportunities to make some people better off without making other people worse off when resources are used in a way that has fully exploited all opportunities to make everyone better off this time of economy enables enables maximum gains from trade possible given the resources available because there is no way to rearrange resource use to make everyone better off

means that everyone gets his or her fair share involves a tradeoff with efficiency (policies that promote this term often come at a cost of decreased efficiency in the economy, and vice versa) example - parking spots dedicated for the disabled (allow disabled to live a fairer life by not having to work so far because they physically can't, but hardly are enough disabled people to fill all spots dedicated for them, so some spots go unused) economists try to use the economy's resources as efficiently as possible in the pursuit of society's goals, specifically with this concept in mind

any simplified representation of reality that is used to better understand real-life situations allow economists to focus on only one change at a time (allow us to hold everything else constant and study how one change affects the overall economic outcome)

means that all other relevant factors remain unchanged important in an economic model because it allows economists to focus on the effects of only one change at a time

illustrates the trade offs facing an economy that produces only two goods shows the maximum quantity of one good that can be produced for any given quantity produced of the other if a production point lies inside or on the frontier, it is feasible if a production point lies outside the frontier, it isn't feasible allows us to simplify reality in order to understand some aspects of the real economy better - a good way to illustrate efficiency (no missed opportunities, no one can be better off without making someone else worse off), opportunity cost (true cost of a good is not just the amount of money it costs to buy it, but everything in addition to money that must be given up), and economic growth (growing ability to produce goods and services, outward shift of frontier)

an individual has this advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual than for other people simplified model, but illustrates that their are gains from trade (both sides can be better off by choosing to specialize in something) and that as long as people have different opportunity costs, everyone has this advantage and this disadvantage in something

in individual has this advantage in an activity if he or she can do it better than other people can produce more output with a given amount of input (resources, often time) signifies who can produce more, but doesn't allow individuals to flourish through trade and gain even more products through cooperation (there are still gains from trade even if one individual has this advantage in both products)

simplest economic transactions in which an individual directly trades a good or service he or she has for a good or service he or she wants rare in modern economy - today people trade goods or services for money and then trade money for other goods and services they want

a model that represents the transactions in an economy by flows around a circle has a flow of physical things (goods, services, labor, raw materials) in one direction and flow of money that pays for these things in the other direction however, only a model - distinction between firms and households isn't always clear cut, many of sales firms make are not to households but to other firms, figure doesn't show government (diverts money from flow in form of taxes)

a person or a group of people that share their income could be, but isn't necessarily, a family important to the economy because they work for the firm that produces goods and services for sale

an organization that produces goods and services for sale important to economy because they employ members of households to make goods and services more efficiently for sale

firms sell goods and services that they produce to households flow of goods and services to households and flow of money to firms in return mutually beneficial relationship that is important to economics

firms buy the resources they need to produce by doing so, the firm gives money to the households, which help produce more goods and services that are then sold to the households for money example - labor market, members of the households working for firms are paid for their time

a resource used to produce goods and services labor (work of human beings), land (resource supplied by nature), capital ("created" resources - machines, buildings), human capital (educational achievements and skills of labor force central to economics because these provide the necessary tools to create goods and services for firms to sell to households in return for money

the branch of economic analysis that describes the way the economy actually works definite right and wrong answers models play crucial role examples - how much revenue will the tolls on the state turnpike yield next year? how much would that revenue increase if the toll were raised from $1 to $1.50?

the branch of economic analysis that makes prescriptions about the way the economy should work attempt to find the "right" answer, in which it sometimes might be a matter of opinion but economists choose the option that makes some people better off without making other people worse off

a simple prediction of the future a major aspect of positive economics, in which economists use models to describe the way the economy really works and make predictions