chapter 1 -3

• What are the three principles concerning economic interactions as per the reference text?

  • trade can make everyone better off
  • markets are usually a good way to organize economic activity, beside governments
  • government can sometimes imporve market outcomes
• What are the three principles that describe how the economy as a whole works according to the reference text?

  • living standard changes depending on its ability to produce G&S
  • prices rise when the government print too much money
  • society face trade-off between inflation and unempolyment
• What is the opportunity cost of seeing a movie = the opportunity cost = the monetary cost of admission + the cost of going to the theater + the cost of attending the show
• Why do policymakers need to think about incentives according to the reference text? ->Understanding the role of incentives is crucial for designing effective policies and predicting behavioral responses.
• What is the main cause of market failure: market failure and externalities
• Why is productivity important: Increases the amount of goods and services that can be produced in a given time + improve standard of living depending on its ability to product G&S
• What is inflation: an increase in the overall level of prices in the economy
• What is the relationship between inflation and unemployment in the short run : they are negatively related
• What is a competitive market: a market in which there are many buyers and many sellers of an identical product so thta each has a negibble advantage over the other on the market price
• Four principles of economic decision-making

  • People face tradeoffs
  • The cost of something is what you give up getting it
  • Rational people think at the margin
  • People respond to incentives
• Three principles concerning economic interactions

  • Trade can make everyone better off
  • Markets are usually a good way to organize economic activity
  • Governments can sometimes improve market outcomes
• Three principles that describe how the economy as a whole works

  • A country's standard of living depends on its ability to produce goods and services
  • Prices rise when the government prints too much money
  • Society faces a short-run tradeoff between inflation and unemployment
• Tradeoffs


  To get one thing that you like, you usually must give up another thing that you like
• Opportunity cost


  What you give up getting something
• Marginal benefit

  The additional utility (satisfaction) gained from the consumption of an additional product
• Incentives

  A change in incentives may cause people's behavior to change as they compare benefits to costs
• Trade among countries isn't a game with some losers and some winners because trade can make everyone better off
• Invisible hand


  The idea that even though individuals and firms are all acting in their own self-interest, prices and the marketplace guide them to do what is good for society as a whole
• Two main causes of market failure

  • Externalities
  • Market power
• Productivity

  The amount of goods and services produced from each hour of a worker's time
• Inflation

  An increase in the overall level of prices in the economy
• Reducing inflation

  Entails costs to society in the form of higher unemployment in the short run
• Sunk cost

  Money that has already been spent and cannot be recovered
• Productivity is important because a country's standard of living depends on its ability to produce goods and services
• Inflation is caused by increases in the quantity of a nation's money
• Providing Social Security benefits

  Lowers an individual's incentive to save for retirement
• Taxation of Social Security benefits

  Discourages work effort after age 65
• Cutting off welfare benefits for able-bodied recipients after 2 years

  Increases their incentive to find jobs
• Cutting off welfare benefits for able-bodied recipients after 2 years

  Reduces income equality but increases economic efficiency
• Specialization and trade can make both countries better off
• Central planning is difficult because it requires enormous amounts of information
• Types of market failure

  • Monopoly
  • Externalities
  • Equity concerns
• Providing universal high-quality healthcare would increase healthcare spending but may reduce economic efficiency
• Unemployment benefits provide equity but reduce efficiency by discouraging work
• If health care is less efficient

  It would give people more health care than they would choose to pay for
• Equity

  If poor people are less likely to have adequate health care, providing more health care would represent an improvement
• When workers are laid off

  Equity considerations argue for the unemployment benefits system to provide them with some income until they can find new jobs
• Unemployment benefits

  A form of insurance since no one plans to be laid off
• Unemployment benefits

  Encourage unemployment and reduce efficiency
• There is a tradeoff between equity and efficiency