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Micro: Chapter 1
Test 1
| Term | Definition |
|---|---|
| economics | study of the production, distribution, and consumption of goods and services; not about money, but about CHOICES |
| market failure | when the individual pursuit of self-interest leads to bad results for society as a whole |
| Individual choice | the decision by an individual of what to do, which necessarily includes a decision of what not to do |
| Principles of Individual Choice | 1. People must make choices bc resources are scarce 2. Opportunity cost of an item is its true cost 3. "How much" decisions require making trade-offs at the margin 4. People usually respond to incentives, exploiting opps to make themselves better off |
| Choices are necessary because resources are scarce | resources (anything used to produce something else) are scarce (not enough available to satisfy needs); scarcity of resources means society as a whole must make choices |
| opportunity cost | the true cost; what you give up to get an item you want (doesn't have to be $, could be time, etc); rank choices, what matters is the next best thing; oc of x is next best alternative |
| marginal decisions | "how much' questions; compare costs/benefits of doing little more of an activity vs a little less; nonbinary = making decisions in incremental steps; skeptical of changes in behavior that don't include incentives |
| marginal analysis | study of marginal decisions |
| incentives | motivate people to action; WILL take advantage of it (fundamental truth of economic behavior); thinking thru policy incentives gives insight on consequences of behavior (ex: protective NFL equipment; safer to play dangerously so more incentive to do so) |
| interaction of choices | my choices affect your choices, and vice versa; feature of most economic situations; results are often quite different from what the individuals intended |
| Principles of the interaction of individual choices (1-3) | 1. There are gains from trade; 2. People respond to incentives, markets move toward equilibrium; 3. Resources should be used as efficiently as possible to achieve society's goals; |
| Principles of the interaction of individual choices (4-5) | 4. Bc people usually exploit gains from trade, markets usually lead to efficiency; 5. When markets don't achieve efficiency, gov intervention can improve society's welfare |
| gains from trade | by dividing tasks & trading, 2 people can each get more of what they want than they could get by being self-sufficient; no one will be worse off bc only trade if you want to |
| specialization | different people engage in different tasks, specializing in those tasks that they're good at performing; economy as a whole can produce more when each person specializes in a task and trades |
| equilibrium | an economic situation when no individual would be better off doing something different |
| Markets move towards equilibrium | people respond to incentives & exploit opps. to be better off (if someone's willing to buy an iphone, someone will make it); equilibrium = no indiv. can be better off w/out making someone else worse off |
| Resources should be used efficiently to achieve society's goals | all opportunities are taken; you can't make one person better off without making someone else worse off; efficiency DOES NOT EQUAL equity |
| Pareto Efficienct | no one can be better off w/out making someone worse off; econ effecienty = max gains w/avail. resources, NOT NECESSARILY EQUITABLE; use resources to achieve society's goals (goal could be equity) |
| Markets usually lead to efficiency | trade allows opportunity for people to be better off; do what's best for you (trade if benefit; don't if you don't); persuing personal interests = most beneficial outcome for the total economy |
| When markets don't achieve efficiency, gov intervention can improve society's welfare | sometimes no incentive for people to do something on an indiv. level that's important on a larger scale (ex: pollution) |
| Principles of Economy-wide interactions | 1.One person's spending is another person's income; 2. Overall spending sometimes gets out of line with the economy's productive capacity; 3. Gov policies can change spending |
| externalities | I do something you can't do anything about; an example of when government might need to step in and help with a market |
Created by:
nicook
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