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
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Government can sometimes improve market outcomes
8. Country's standard living depends on its ability to produce goods and services
9. Prices rises when the government prints to much money
10. Society faces a short run trade off between inflation and unemployment
Meaning of 'there ain't no such thing as free lunch'
Way butang nga way kapalit
Society face trade offs
Efficiency and equality
Society is getting the maximum benefits from its scarce resources
Efficiency
Means that those benefits are distributed uniformly among societies members
Equality
Refers to what you give up to get that item or option
Opportunity cost
People who systematically and purposefully do the best they can to achieve their objectives
Rational people
A small incremental adjustment to a plan of action
Marginal change
Something that induces a person to act ex. Rewards or punishments
Incentive
Who responds to incentives
Rational people
Countries benefits from trade and specialization
1. Get a better price abroad for goods they produce
2. Buy other goods more cheaply from abroad that could be produced at home
A group of buyers and sellers
Market
Organize economic activities means determining
1.What goods to produce
2. How to produce them
3. How much of each to produce
4. Who gets them
An economy that allocates resources through the decentralized decisions of many firms and household as they imteract in the markets for goods and services
Market economy
What was Adam Smith's famous insight in the wealth of nations
"Led by an invisible hand"
What year was Adam Smith famous insight proclaimed
1776
•The interaction of buyers and sellers determines prices
• each price reflects the good's value to buyers and the cost of producing the goods
•Prices guide self-interested households and firms to make decisions that in many cases, maximize society's economic well being
The invisible hand works through the price system
1. Enforced property rights(with police, courts)
2. People are less inclined to work, produce, invest, purchase if large risk of their property being stolen
3. Promote social welfare
Important role for government
The ability of an individual to own and exercise control over scarce resources
Property rights
A situation in which a market left on its own fails to allocate resources efficiently
Market failure
The impact of one person's action on the well being of a bystander
Externality
The ability of a single economic actor to have a substantial influence on the market prices
Market power
What might public policy promote?
Efficiency
Government may alter market outcome to promote ____
Equity
The most important determinant of living standards. The amount of goods and services produced per unit of labor
Productivity
Increase in the general level of prices
Inflation
Almost always caused by excessive growth in the quantity of money, which causes the value of money to fall
Inflation
The faster the government creates money, ____
The greater the inflation rate
Fluctuations in economic activity, such as employment and production
Business cycle
Most economist describes the short run effects of monetory injections as follows:
•INCREASING THE AMOUNT OF MONEY in economy stimulates the overall level of spending and thus the demand for goods and services
•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