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ECO100Y1 (111)
Jack Carr (6)
Midterm

first test def

6 Pages
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Department
Economics
Course Code
ECO100Y1
Professor
Jack Carr

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How people make decisions:
1. ppl face trade-offs
a.guns vs butter
i.national defence vs, consumer goods to raise standard of living
b. environment vs. high income
i.more expensive for firms=lower profit
2. cost of smth is what you guve up to get it
3. rational ppl think at the margin
4. ppl respond to incentives
How Ppl Interact
5. trade can make everyone better off
6. markets are usually a good way to organize economic activity
7. gov’t can sometimes improve way to organize economic activity
How the Economy as a Whole Works
8. a country’s standard of living depends on its ability to produce goods and services
Goods and Services
9. prices rise when the gov’t prints too much money
10. society faces a short-run trade-off between inflation and unemployment
Scarcity: the limited nature of society’s resources
Economics: the study of how society manages its scarce resources
Efficiency: the property of society getting the most it can from its scarce resources
Equity: the property of distributing economic prosperity fairly among the members of
society
-efficiency refers to the size of the economic pie and equity refers to how the pie is
divided, often when gov’t policies are being designed, these two goals conflict
oie, gov’t employment policies, welfare system, taxeswhile gov’t cutting
pie, pie gets smaller, ppl less motivated to work hard
-ppl more likely to make good decisions if they know their options
Opportunity cost: whatever must be given up to obtain some item
Rational people: people who systematically and purposefully do the best they can to
achieve their objectives
Marginal changes: small incremental adjustments to a plan of action
- adjustments around the edges of what you’re doing
Incentive: something that induces a person to act
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
Property rights: the ability of an individual to own and exercise control over scarced
resources
-need the gov’t so that the invisible hadn would work—forces ppl to follow laws
-also need gov’t to promote efficiency and equity
Market failure: a situation in which a market left on its own fails to allocate resources
efficiently
www.notesolution.com
- possible causes of market failure are externality and market power
Externality: the impact of one person’s actions on the well-being of a bystander
-ex. pollution
Market power: the ability of a single economic actor(or small group of actors) to have a
substantial influence on market prices,
-ie. Only spring
-in the case of externality and market power a well-designed policy can enhance
economic efficiency
-invisible hand may fail at distributing prosperity equitablymarket economy
rewards ppl asccording to their ability to produce things that other ppl are willing
to pay for
Productivity: the quantity of good and services produced from each hour of a worker’s
times
-productivity is related to standard of living
Inflation: an increase in overall level of prices in the economy
-cause of inflation:growth in the quantity of moneyvalue of money falls
-trade-off between unemployment and inflation
Business cycle: fluctuations in economic activity, such as employment and production
-assumptions: used to simplify complex world and make it easier to
understandsometimes helps focus thinking
Production Possibilities Frontier(PPF): a graph that shows the combinations of output
that the economy can possibly produce given the available factors of production and the
available production of technology
-PPF shows need for trade-offs…choose one over the other = opportunity cost
-Shows one good as measured in terms of another
Microeconomics: the study of how households and firms make decisions and how they
interact in markets
Macroeconomics: the study of economy-wide phenomena, including inflation,
unemployment, and economic growth
Positive statements: claims that attempt to describe the world as it is
Normative statements: claims that attempt to prescribe how the world should be
- positive statements can be proven, normative cannot be judged using data alone
Absolute advantage: the comparison among producers of a good according to their
productivity
Comparative advantage: the comparison among producers of a good according to their
opportunity cost
Imports: goods and services produced abroad and sold domestically
Exports: goods and services produced domestically and sold abroad
Market: a group of buyers and sellers of a particular good or service
Competitive market: a market in which there are many buyers and many seller so that
each has a negligible impact on the market price
-a market that is perfectly competitive assumptions:
oall the exact same good
www.notesolution.com

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Description
How people make decisions: 1. ppl face trade-offs a. guns vs butter i. national defence vs, consumer goods to raise standard of living b. environment vs. high income i. more expensive for firms=lower profit 2. cost of smth is what you guve up to get it 3. rational ppl think at the margin 4. ppl respond to incentives How Ppl Interact 5. trade can make everyone better off 6. markets are usually a good way to organize economic activity 7. govt can sometimes improve way to organize economic activity How the Economy as a Whole Works 8. a countrys standard of living depends on its ability to produce goods and services Goods and Services 9. prices rise when the govt prints too much money 10. society faces a short-run trade-off between inflation and unemployment Scarcity: the limited nature of societys resources Economics: the study of how society manages its scarce resources Efficiency: the property of society getting the most it can from its scarce resources Equity: the property of distributing economic prosperity fairly among the members of society - efficiency refers to the size of the economic pie and equity refers to how the pie is divided, often when govt policies are being designed, these two goals conflict o ie, govt employment policies, welfare system, taxeswhile govt cutting pie, pie gets smaller, ppl less motivated to work hard - ppl more likely to make good decisions if they know their options Opportunity cost: whatever must be given up to obtain some item Rational people: people who systematically and purposefully do the best they can to achieve their objectives Marginal changes: small incremental adjustments to a plan of action - adjustments around the edges of what youre doing Incentive: something that induces a person to act 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 Property rights: the ability of an individual to own and exercise control over scarced resources - need the govt so that the invisible hadn would workforces ppl to follow laws - also need govt to promote efficiency and equity Market failure: a situation in which a market left on its own fails to allocate resources efficiently www.notesolution.com
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