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ECO1104MicroeconomicsChapter 1Ten Principles of EconomicsScarcitythe limited nature of societys resourcesEconomicsthe study of how society manages its scarce resourcesEfficiencythe property of society getting the most it can from its scarce resourcesEquitythe property of distributing economic prosperity fairly among the members of societyOpportunity costwhatever must be given up to obtain some itemRational peoplepeople who systematically and purposefully do the best they can to achieve their objectivesMarginal Changessmall incremental adjustments to a plan of actionIncentivesomething that induces a person to actMarket economyan economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and servicesProperty rightsthe ability of an individual to own and exercise control over scarce resourcesMarket failurea situation in which a market left on its own fails to allocate resources efficientlyExternalitythe impact of one persons actions on the wellbeing of a bystander ex pollutionMarket powerthe ability of a single economic actor or small group of actors to have a substantial influence on market prices ex water and one wellProductivitythe quantity of goods and services produced from each hour of a workers timeInflationan increase in the overall level of prices in the economyBusiness Cyclefluctuations in economic activity such as employment and productionHow People Make DecisionsPrinciple 1People Face TradeoffPrinciple 2The Cost of Something Is What You Give up to Get itPrinciple 3Rational People Think at the Marginmarginal benefit exceeds marginal costsPrinciple 4People Respond to IncentivesHow People InteractPrinciple 5Trade Can Make Everyone Better OffPrinciple6Markets Are Usually a Good Way to Organize Economic Activitycollapse of communism in the Soviet Union and Eastern Europe in the 1980s caused this changeCentral planners decided what goods and services were produced how much and who produced and consumedFirms decide who to hire and people to decide who to work forPrinciple 7Governments Can Sometimes Improve Market Outcomesgovernment can improve on market outcomes but dont alwaysHow the Economy as a Whole WorksPrinciple 8A Countrys Standard of Living Depends on Its ability to Produce Goods and ServicesIndividuals incomes have historically grown 2 percent per year in CanadaDue to productivityGrowth rate of productivity is determined by growth rate of average income Principle 9Prices Rise When the Government Prints Too Much MoneyKeeping inflation low is a goal of economic policymakersCauses various costs on societyPrinciple 10Society Faces a ShortRun Tradeoff between Inflation and Unemploymentincrease in money in the economy stimulates the overall spending and thus the demand for goods and servicesHigher demandshigher pricesincrease in quantity of goods and servicesmore hiringlower unemploymentChapter 2Thinking Like An EconomistCircularflow diagrama visual model of the economy that shows how dollars flow through markets among households and firmsProduction Possibilities Frontiera graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technologyMicroeconomicsthe study of how households and firms make decisions and how they interact in marketsMacroeconomicsthe study of economywide phenomena including inflation unemployment and economic growthPositive statementsclaims that attempt to describe the world as it isNormative statementsclaims that attempt to prescribe how the world should beThe Economist as ScientistEconomists apply the logic of science to examine how an economy worksThe Scientific Method Observation Theory and More ObservationHard for economists to manipulate dataThe Role of AssumptionsEconomic Models
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