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MicroEcon Chapter 1
Review of 10 Principles of Economics
| Question | Answer |
|---|---|
| Where does economics start? | The household. It must allocate scarce resources to complete tasks. These resources would be time, energy, and car mileage. Decisions such as: Who cooks dinner? Gets groceries? |
| What kinds of questions does economics address? | How people decide what to buy, how much to work, save, spend How firms decide how much to produce, many workers to hire How society decides how to divide its resources to produce either consumer goods (cell phones, cars, TVs) or national defense (guns) |
| What is scarcity? | The limited nature of society’s resources. (we cannot produce all goods and services people want) |
| What is economics? | The study of how society manages its scarce resources. |
| How does the economy work? | Different people (agents) interact with each other. They can be buyers and sellers. Individual decision-making moves economy along. |
| What principle of economics involves making decisions that require giving up something else. | People face trade-offs. All decisions involve tradeoffs. Consider time and money as limited resources. |
| Which principle of economics involves going to a party the night before your midterm leaves less time for studying. | People face trade-offs. |
| Which principle of economics involves an extra dollar on one good, leaves us with fewer dollars on other goods? | People face trade-offs. Your income is limited. Can spend on a vacation OR buying a large TV. |
| Both people and society both face tradeoffs. True or False? | True. |
| Which principle is here: More money spent on guns (national defense), leaves us with less money to spend on butter. | Society also faces tradeoffs. But the use or consumption of butter improves standard of living/quality of life. BUT, spending on national defense improves our security! |
| What is Efficiency? | When society gets the most from its scarce resources. Efficiency=> how large the pie is. |
| What is Equality? | When benefits are distributed equally among society’s members. Equality=> how each slice is cut into pieces. |
| What is the Cost of Something? | What You Give Up to Get It Because of tradeoffs, you have to give up one good for the other. Making decisions requires comparing the costs and benefits of alternative choices. |
| What is Opportunity Cost? | The opportunity cost of any item is whatever must be given up to get it. When you choose Good A over Good B, there is a cost involved. The cost is: you have given up Good B! |
| Opportunity cost is inolved in your everyday life. True of False? | True. |
| What principle is this? Rational people systematically and purposefully do the best they can to achieve their objectives. | Rational People Think at the Margin Make decisions by comparing costs and benefits of marginal changes. |
| What are marginal changes? | Incremental/additional changes to behavior. |
| What principle is this example? Firms will always try to earn high profits by deciding how many workers to hire. | Rational People Think at the Margin Make decisions by comparing costs and benefits of marginal changes. |
| What is an incentive? | Something that induces a person to act, i.e. the prospect of a reward or punishment. |
| Rational people do not respond to incentives. True or False? | False. |
| Which principle of economics is in this example? When gas prices rise, consumers buy more hybrid cars and fewer SUVs. | Rational people respond to incentives |
| Which principle of economics is in this example? When cigarette taxes increase, teen smoking falls. | Rational people respond to incentives |
| What is the opportunity cost of spending on a DVD? | What you give up to get it; the lunch that you have to give up. |
| What is the opportunity cost of going to college for a year? | What you give up to get it; is not just the tuition, books, and fees, but also the wages earned as a professional athlete you give up on. |
| What is the opportunity cost of seeing a movie? | What you give up to get it; is not just the price of the ticket, but the time you could have spent studying. |
| What is the opportunity cost of studying one more hour or messaging your friends? | You compare the benefit of a little more study time with its cost Your Benefits: high grade. Costs: time spent on studying. The additional one hour is the marginal change |
| What principle is this example? Get a better price abroad for goods they produce. Buy other goods more cheaply from abroad. | Trade can make everyone better off Trade between two countries can make them better off. People can specialize in producing something they are good at and exchange it. You can produce corn; while you can go to a doctor for a medical checkup. |
| What is a market? | Market: a group of buyers and sellers (need not be in a single location) Amazon, Ebay is a marketplace and so is the farmer’s market on weekends. |
| What does the principle, "Markets Are Usually A Good Way to Organize Economic Activity," mean? | “Organize economic activity” means determining –what goods to produce –how to produce them –how much of each to produce –who gets them |
| What are the principles of decision making? | –People face tradeoffs. –The cost of any action is measured in terms of foregone opportunities. –Rational people make decisions by comparing marginal costs and marginal benefits. –People respond to incentives. |
| What are the principles of interactions among people? | –Trade can be mutually beneficial. –Markets are usually a good way of coordinating trade. |
| Economics is best defined as the study of: | how society manages its scarce resources. |
| Resources are: | scarce for households and scarce fo economies |
| The phenomenon of scarcity stems from the fact that | resources are limited. |
| Billie Jean has $120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to while working out. Both cost $120, so she can buy only one. This illustrates the basic concept that: | people face trade-offs. |
| Which of the following is true? | Efficiency refers to the size of the pie; equality refers to how the pie is divided. |
| Hamid spends an hour studying instead of watching TV with his friends. The opportunity cost to him studying is: | the enjoyment he would have received if he had watched TV with his friends. |
| While pollution regulations yield the benefit of a cleaner environment, the regulations come at the cost of reducing incomes of the related firms owners, workers, and customers. This statement illustrates the principle that: | People face trade-offs. |
| High school athletes who skip college to become professional athletes: | Understand that the opportunity cost of attending college is very high. |
| Rational people make decisions "at the margin" by comparing: | Additional costs and benefits. |
| Factors of production are: | Inputs into the production process. (land, labor and capital) |
| In the simple circular-flow diagram, who buys the factors of production? | Firms only. Firms hire the factors of production (land, labor and capital) from households and provide them with rent, wages and interest for their use. |
| A "woman buys corn for dinner," in which market in the circular-flow diagram. | goods & services. |
| In the circular-flow diagram, what represents a payment for a factor of production? | interest is paid in the factor market the use of capital. |
| Unemployment would cause an economy to: | Produce inside it production possibilities frontier. |
| A movement upward and to the left along the demand curve is called a(n): | decrease in quantity demanded. Movements along the demand curve (moving up or down) leads to either an increase or decrease in quantity demanded. |
| An increase in the price of a good will: | decrease quantity demanded. (Law of Demand) |
| If a good is normal, then an increase in income will result in an: | increase in the demand for the good. Demand for a normal good (cars, computers) increase when incomes increase. Demand curve shifts to the right. |
| Today's demand curve for gasoline could shift in response to change in: | the expected future price of gasoline. |
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