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Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes
Semester
Fall

Description
Definitions o Scarcity: the limited nature of society’s resources. o Economics: the study of how society manages its scarce resources. o Efficiency: the property of society getting the most it can from its scarce resources. o Equity: the property of distributingeconomic prosperity fairly among the members of society. o Opportunity cost: whatever must be given up to obtain an item. o Marginal changes: small incremental adjustments to a plan of action. o Market economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. o Market failure: a situation in which a market left on its own fails to allocate resources efficiently. o Externality: the impact of one person’s actions on the well-being of a bystander. o Market power: the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices. o Productivity: the quantity of goodsand services produced from each hour of a worker’s time. o Inflation: an increase in the overall level of prices in the economy. o Phillips curve: a curve that shows the short-run tradeoff between inflation and unemployment. o Business cycle: fluctuations in economic activity, such as employment and production. o Circular-flow diagram: is a visual model of the economy that shows how dollars flow through markets among households and firms o Production possibilities frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. Introduction  The fundamental economic problem: resources are scarce.  “Economy” comes from the Greek word meaning “one who manages a household.” o Because in an economy we are faced with many decision just as a household is. 10 Principles of Economics HOW PEOPLE MAKE DECISIONS- Scarcity: Resource Allocation leading to efficiency. 1. People face tradeoffs – efficiency & equity  “No such thing as a free lunch” – therefore making a decision requires trading one goal for another.  Recognizing that tradeoffs exist does not indicate what decisions should be made. 2. The cost of something is what you give up to get it – opportunity cost  Considering the benefits and the costs of the action. 3. Rational people think at the margin – marginal cost 4. People respond to incentives  People’s responses may change to correspond with a change in cost orbenefits HOW PEOPLE I
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