The 10 Principles
A change in the cost or benefit of an action that causes people to act differently is called this
An incentive
Economists make these to simplify a complex world
Assumptions / models
This producer can make a good using fewer inputs than another
Absolute advantage
This is what happens to quantity demanded when price rises (all else equal)
It falls
This diagram shows how money and goods flow between households and firms
The circular-flow diagram
Markets are usually a good way to do this with economic activity
Organize it
A statement that describes the world as it is, and can be tested, is called this
A positive statement
This producer can make a good at a lower opportunity cost than another
Comparative advantage
If price is set above equilibrium, this occurs in the market
A surplus, and price will fall
The two factors of production besides labor and capital
Land
A country's living standards are ultimately determined by this
Productivity
Thinking at the margin means comparing the marginal benefit and this
The marginal cost
Specializing in your comparative advantage good and trading lets the size of this "grow"
The economic "pie"
If incomes rise and a good is normal, demand shifts in this direction
Right (demand increases)
This occurs when a transaction affects a bystander who wasn't part of it
An externality
This happens to prices, in the long run, when the government prints too much money
Prices rise
A cost that has already been incurred and cannot be recovered, which should be ignored in decisions
A sunk cost
An exchange rate for trade must fall between these two things in order for both sides to benefit
The two producers' opportunity costs of the traded good
Name two things (other than price of the good itself) that can shift a demand curve
Price of related goods (substitutes/complements); income; expectations; number of buyers; tastes (any two)
A statement that something should be done is called this type of statement
A normative statement
Name and briefly describe society's short-run tradeoff between these two macroeconomic variables
Inflation and unemployment — in the short run, policies that lower one tend to raise the other
A decision-maker who systematically and purposefully does the best they can to achieve their goals is called this
A rational person
A producer with the absolute advantage in both goods may still not have this in either good — true or false? Explain
False — comparative advantage is about opportunity cost, not absolute input requirements; a country can have the absolute advantage in everything but still lack the comparative advantage in one of the two goods
Suppose at the same time wages of input-suppliers fall AND the price of a substitute good falls. What happens to equilibrium price? To quantity?
Price falls for sure (both shifts push it down); quantity's effect is ambiguous (the shifts pull quantity in opposite directions)
This is the bowed-out shape of a PPF, caused by this fact about opportunity cost
Bow-shaped; caused by opportunity cost rising as more of a good is produced (resources aren't equally well-suited to every use)