ECON 2133: Exam 1

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ECON 2133
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Economics
Art or Science of making decisions
Scarcity
the limited nature of society's resources
Efficiency
when society gets the most from its scarce resources
Equality
when prosperity is distributed uniformly among society's members
opportunity cost
whatever must be given up to obtain it it is the relevant cost for decision making*cost is not just the monetary value!
Rational People
systematically and purposefully do the best they can to achieve their objectives.
Marginal changes
incremental adjustments to an existing plan
Incentive
Something that induces a person to act, i.e. the prospect of a reward or punishment.
Market
a group of buyers and sellers (need not be in a single location)
Market Economy
allocates resources through the decentralized decisions of many households and firms as they interact in the markets.
Market Failure
when the market fails to allocate society's resources efficiently
Externalities
when the production of consumption of a good affects bystanders (e.g. pollution)
Market Power
a single buyer or seller has substantial influence on market price (e.g. monopoly)
Productivity
the amount of goods and services produced per unit of labor
The most important determinant of living standards: ________
productivity
Inflation
increases in the general level or prices in the long run,inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall.
In the short run (1-2 years)
many economic policies push inflation and unemployment in opposite directions
Microeconomics
is the study of how households and firms make decisions and how they interact in markets
Macroeconomics
is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.
Economist play two roles
1. scientists 2. policy advisors
Scientific Method
the development and testing of theories about how the world works.
Positive statements
attempt to describe the world as it is positive statements can be confirmed or refuted, normative statements cannot
normative statements
attempt to prescribe how the world should be
Model
a highly simplified representation of a more complicated reality.
Circular-flow diagram
a visual model of the economy, shows how dollars flow through markets among households and firms
Two markets
-the market for goods and services -the market for "factors of production"
Factors of Production
the resources the economy uses to produce goods and services including: labor, land and capital
Firms
buy/hire factors of production, use them to produce goods and services
Households
own factors of production, sell/rent them to firms for income Buy and consume goods and services
Production Possibilities Frontier (PPF)
a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

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