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
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
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.
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