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Micro: Chapter 1

Test 1

TermDefinition
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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