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The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives.
What are the three Principles we have to know in order to understand the question “How People Interact”. Explain all of them in detail, please. How People Interact
Trade can make everyone better off.
Markets are usually a good way to organize economic activity.
Governments can sometimes improve economic outcomes.
What are the three Principles we have to know in order to understand the question “How the Economy as a whole works”. Explain all of them in detail, please. How the Economy as a Whole Works
The standard of living depends on a country’s production.
Prices rise when the government prints too much money.
Society faces a short-run tradeoff between inflation and unemployment.
3.One tradeoff that society faces is between efficiency and equity. Define each term and explain this tradeoff. What do they have to do with government policy? Efficiency means that society is getting the most it can from its scarce resources. Equity means that the benefits of those resources are distributed fairly among society’s members. In other words, efficiency refers to the size of the economic pie, and
equity refers to how the pie is divided. Often, when government policies are being
designed, these two goals conflict. Consider, for instance, policies aimed at achieving a more equal distribution of economic well-being. Some of these policies, such as the welfare system or unemployment insurance, try to help those members of society who are most in need. Others, such as the individual income tax, ask the financially successful to con-tribute more than others to support the government.
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4.Under what conditions might a government intervention in an economy improve the market outcome? Hint: Market failure:
Although markets are usually a good way to organize economic activity, this rule
has some important exceptions. There are two broad reasons for a government to
intervene in the economy: to promote efficiency and to promote equity. That is,
most policies aim either to enlarge the economic pie or to change how the pie is divided.
The invisible hand usually leads markets to allocate resources efficiently.
Nonetheless, for various reasons, the invisible hand sometimes does not work. Economists use the term market failure to refer to a situation in which the market on its own fails to allocate resources efficiently.
5.Why is productivity so important in an economy and what steps can the government take to increase productivity?
Almost all variation in living standards is attributable to differences in countries’ productivity—that is, the amount of goods and services produced from each hour of a worker’s time. The fundamental relationship between productivity and living standards is simple, but its implications are far-reaching. If productivity is the primary determinant of living standards, other explanations must be of secondary importance. For example, it might be tempting to credit labor unions or minimum-wage laws for the rise in living standards of American workers over the past century. Yet the real hero of American workers is their rising productivity. As another example, some commentators have claimed that increased competition from Japan and other countries explains the slow growth in U.S. incomes over the past 30 years. Yet the real villain is not competition from abroad but flagging productivity growth in the United States.
6.Adam Smith used the term “invisible hand” in his 1776 book The Wealth of Nations. Prices are the instrument with which the invisible hand directs economic activity in a Market Economy. Explain the theory by defining the Market Economy.
market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
6. In advocating a laissez-faire policy, Smith was very cautious. His invisible hand works to tie public interests to private interests only when competitive forces exist to channel self-interest to the social good. His exceptions to laissez faire situations in which he saw the public good as not flowing from competitive markets are standard fare in modern welfare economics and are sometimes cited in socialist calls for government intervention. No other economist has had the impact on economic policy of Adam Smith. Modern economics has added extensive formalization to Smith's vision but little to its inherent insights.
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| People gain from their ability to trade with one another. | | | Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run. Demonstrate your answer by explaining Philips Curve. |