Chapter 1 Key terms- - indicates that there is less of a good freely available from nature than people would like. -Mechanisms that have been used to deal with the problems of scarcity 1.Force 2.Tradition 3.Authority 4.Market 5.Combination of 1-4Scarcity and poverty is not the same thing: Absence of poverty implies that some basic level of need has been met; absence of scarcity implies that our desires for goods are fully satisfied. Some day we may eliminate poverty but never scarcity.- Opportunity cost- the highest valued alternative that must be sacrificed as a result of choosing an option. (what you give up)- Utility- The subjective benefit or satisfaction a person expects from a choice or course of action.- The economic way of thinking: -There is always trade -offs - Individuals choose purposefully: Referred to as economizing behavior-Try to get the most benefits for the least cost. -Incentive matters: As incentives goes up you are more likely to do something and vice versa. -Good intentions do not necessary result in good outcomes -Fallacy of composition: Assumption what is good for an individual is good for a group. An Inquiry into the Nature and causes of the wealth of nations by Adam Smith (1776) Smith believed a market economy would generally bring individual self-interest and the public interest into harmony.Chapter 2Key terms Transaction cost-the time and effort and other resources necessary to search out, negotiate, andconclude an exchange hinder the gains from trade in an economy.Private property rights- Owners use their resources in ways to benefit other and avoid doing harm to them(only one person owns it)Common rights-Everyone owns itMutual gain- Is a foundation of trade, when two parties engage in voluntary exchange they are both made better off.The law of comparative advantage- Makes the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost(translation: Make something your good at and trade for something you’re not good at)Production Possibilities curve- Shows the maximum combination of any two products that can be produced with a fixed quaintly of resources.Over time a PPC can be shifted outward by:-Investment-Technological advances-Improved institution-Great work effort (forgoing leisure)-All outputs on the PPC are efficient-All points outside the curve are unattainable-All points inside the curve are inefficient-If the curve shifts out that means growth in production If the curve shifts inward it means it is producing less. Chapter 3Key termsLaw of demand- the inverse relationship between price and quantity demanded, when price rises quantity demand falls When price changes, quantity demanded changes but demand does not change (This is a movement along the demand curve)-A change in demand is a shift in the entire demand curve. A change in quantity demanded is a movement along the same demand curve.The law of supply-Positive or direct relationship between price and quantity supplied, when price rises, Quantity supplied rises, as price decreases producers will supply less.Supply and demand curves(Below)Increase in demand-shifts upDecrease in demand- shifts downIncrease in supply shifts rightDecrease in supply-shifts
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