Econ 2030 Exam 1 (Guo) Study Guide
scarcity - ANSWER the limited nature of society's resources
- cannot produce all the goods and services people wish to have
economics - ANSWER the study of how society manages its scarce resources
principle 1 - ANSWER to get something we like, we have to give up something
else that we also like
- ex. more partying = less studying
- tradeoff: to achieve greater equality, could redistribute income from wealthy
income
efficiency - ANSWER society gets the most from its scarce resources
equality - ANSWER prosperity is distributed uniformly among society's members
principle 2 - ANSWER the cost of something is what you give up to get it
- making decisions including opportunity costs and compare costs with benefits
of alternatives
principle 3 - ANSWER rational people think at a margin
- rational people make decisions by evaluating the costs and benefits of
marginal changes
- systematically and purposefully do the best they can to achieve their objectives
- take action only if marginal benefits > marginal costs
principle 4 - ANSWER people respond to incentives
- ex. when gas prices rise, consumers buy more hybrid cars and fewer gas
guzzling SUVs
incentive - ANSWER something that induces a person to act
principle 5 - ANSWER trade can make everyone better off
- people can buy a greater variety of goods and services at a lower cost
- countries benefit from trade and specialization
principle 6 - ANSWER markets are usually a good way to organize economic
activity
- determining quantity to produce, what to produce, and who to produce
- a market economy allocates resources
, invisible hand - ANSWER prices guide self-interested households and firms to
make decisions that maximize society's economic well-being
principle 7 - ANSWER governments can sometimes improve market outcomes
- governments enforce rules and maintain institutions that are key to a market
economy
- governments promote efficiency and equality
market power - ANSWER a single buyer or seller has substantial influence on
market price
- eg. monopoly
externality - ANSWER producers and consumers affects bystanders
sources of market failure - ANSWER market power and externality
principle 8 - ANSWER country's standard of living depends on it's ability to
produce goods and services
- huge variation in living standards across countries and over time
productivity - ANSWER quantity of goods and services produced from each unit
of labor unit
- most important determinant of living standards
principle 9 - ANSWER prices rise when the government prints too much money
inflation - ANSWER an increase in the overall level of prices in the economy
principle 10 - ANSWER society faces a short-run tradeoff between inflation and
unemployment
- inverse relationship
- other factors can make this tradeoff more or less favorable, but the tradeoff is
always present
circular flow diagram - ANSWER
PPF (production possibilities frontier) - ANSWER a graph that shows
combinations of output that the economy can possibly produce
- points on and under the PPF are possible
- movement along a PPF involves shifting resources from the production of one
good to the other
- slope = opportunity cost of good X/opportunity cost of good Y
constant opportunity cost on a PPF - ANSWER
increasing opportunity cost on a PPF - ANSWER
scarcity - ANSWER the limited nature of society's resources
- cannot produce all the goods and services people wish to have
economics - ANSWER the study of how society manages its scarce resources
principle 1 - ANSWER to get something we like, we have to give up something
else that we also like
- ex. more partying = less studying
- tradeoff: to achieve greater equality, could redistribute income from wealthy
income
efficiency - ANSWER society gets the most from its scarce resources
equality - ANSWER prosperity is distributed uniformly among society's members
principle 2 - ANSWER the cost of something is what you give up to get it
- making decisions including opportunity costs and compare costs with benefits
of alternatives
principle 3 - ANSWER rational people think at a margin
- rational people make decisions by evaluating the costs and benefits of
marginal changes
- systematically and purposefully do the best they can to achieve their objectives
- take action only if marginal benefits > marginal costs
principle 4 - ANSWER people respond to incentives
- ex. when gas prices rise, consumers buy more hybrid cars and fewer gas
guzzling SUVs
incentive - ANSWER something that induces a person to act
principle 5 - ANSWER trade can make everyone better off
- people can buy a greater variety of goods and services at a lower cost
- countries benefit from trade and specialization
principle 6 - ANSWER markets are usually a good way to organize economic
activity
- determining quantity to produce, what to produce, and who to produce
- a market economy allocates resources
, invisible hand - ANSWER prices guide self-interested households and firms to
make decisions that maximize society's economic well-being
principle 7 - ANSWER governments can sometimes improve market outcomes
- governments enforce rules and maintain institutions that are key to a market
economy
- governments promote efficiency and equality
market power - ANSWER a single buyer or seller has substantial influence on
market price
- eg. monopoly
externality - ANSWER producers and consumers affects bystanders
sources of market failure - ANSWER market power and externality
principle 8 - ANSWER country's standard of living depends on it's ability to
produce goods and services
- huge variation in living standards across countries and over time
productivity - ANSWER quantity of goods and services produced from each unit
of labor unit
- most important determinant of living standards
principle 9 - ANSWER prices rise when the government prints too much money
inflation - ANSWER an increase in the overall level of prices in the economy
principle 10 - ANSWER society faces a short-run tradeoff between inflation and
unemployment
- inverse relationship
- other factors can make this tradeoff more or less favorable, but the tradeoff is
always present
circular flow diagram - ANSWER
PPF (production possibilities frontier) - ANSWER a graph that shows
combinations of output that the economy can possibly produce
- points on and under the PPF are possible
- movement along a PPF involves shifting resources from the production of one
good to the other
- slope = opportunity cost of good X/opportunity cost of good Y
constant opportunity cost on a PPF - ANSWER
increasing opportunity cost on a PPF - ANSWER
