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| means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything he or she wants, each individual in a society cannot attain the highest standard of living to which he or she might aspire. |
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| the study of how society manages its scarce resources |
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| means that society is getting the maximum benefits from its scarce resources |
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| means that those benefits are distributed uniformly among society's members. |
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| The Cost of Something Is What You Give Up to Get It |
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| of an item is what you give up to get that item. opportunity cost |
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| Rational People Think at the Margin |
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| Trade Can Make Everyone Better Off |
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| Markets Are Usually a Good Way to Organize Economic Activity |
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| an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services |
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Governments Can Sometimes Improve Market Outcomes
Principle 7 |
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| o refer to a situation in which the market on its own fails to produce an efficient allocation of resources. |
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| which is the impact of one person's actions on the well-being of a bystander. |
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| which refers to the ability of a single person (or small group) to unduly influence market prices. |
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| A Country's Standard of Living Depends on Its Ability to Produce Goods and Services |
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| the amount of goods and services produced from each unit of labor input. |
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| Prices Rise When the Government Prints Too Much Money |
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| Society Faces a Short-Run Trade-off between Inflation and Unemployment |
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| production possibilities frontier |
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| a graph that shows the various combinations of output—in this case, cars and computers—that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output. |
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| is the study of how households and firms make decisions and how they interact in specific markets. |
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| is the study of economywide phenomena. |
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| are descriptive. They make a claim about how the world is. |
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| are prescriptive. They make a claim about how the world ought to be. |
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| Why do economists so often appear to give conflicting advice to policymakers? There are two basic reasons: |
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Economists may disagree about the validity of alternative positive theories about how the world works.
Economists may have different values and therefore different normative views about what policy should try to accomplish. |
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| The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. |
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| measures the trade-off between the two goods that each producer faces. |
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| The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it |
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| Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises. |
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| a table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good consumers want to buy. |
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| downward-sloping line relating price and quantity demanded is called the |
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| a good for which, other things equal, an increase in income leads to an increase in demand |
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| good for which, other things equal, an increase in income leads to a decrease in demand |
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| two goods for which an increase in the price of one leads to an increase in the demand for the other |
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| fall in the price of one good raises the demand for another good |
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| Other things equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well. |
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| a table that shows the relationship between the price of a good and the quantity supplied, holding constant everything else that influences how much producers of the good want to sell. |
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| curve relating price and quantity supplied is called |
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| situation in which the market price has reached the level at which quantity supplied equals quantity demanded |
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| The price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance. |
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| Three Steps to Analyzing Changes in Equilibrium |
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| First, we decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves. Second, we decide whether the curve shifts to the right or to the left. Third, we use the supply-and-demand diagram to compare the initial and the new equilibrium, which shows how the shift affects the equilibrium price and quantity. |
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