10 Principles

Question 1

How people make decisions.

Answer 1

1. Trade offs.
2. Cost of something.
3. Rational people think at the margin.
4. People respond to incentives.

Question 2

1. People face trade offs.

Answer 2

I have to give someone something in order to get what I want.

Question 4

Efficiency.

Answer 4

How people make the most of their scarce resources.

Question 5

Equity.

Answer 5

The property of distributing economic prosperity fairly among the members of society. (Cut the economic pie in equal pieces for everyone).

Question 6

Opportunity cost.

Answer 6

What you give up to get something: money, time, etc.

Is the benefit good enough?

Question 7

3. Rational people think at the margin.

Answer 7

Use marginal changes to make minimal adjustments to a plan of action. Compare marginal benefit to marginal cost. Rational decision makers take action if and only if the marginal benefit is larger than the marginal cost.

Question 8

4. People respond to incentives.

Answer 8

Incentives have different outcomes, altering the way an individual behaves and consequentially invests.

Question 9

How people interact.

Answer 9

5. Trade makes everyone better.
6. Markets are a good way to organize the economy.
7. Governments can sometimes improve market economies.

Question 10

5. Trade can make everyone better.

Answer 10

Trade allows everyone to specialize in what they do best.

Question 11

6. Markets are a good way to organize the economy.

Answer 11

Firms and households interact in the marketplace. Self interest gets the market economy going since everyone is working for themselves and this benefits others. When the government alters the prices, the market economy suffers.

Question 12

7. Governments can sometimes improve market economies.

Answer 12

If the governments keep in rule and maintain the institutions who are key to the market then the economy doesn’t suffer. For this, property rights are fundamental.

Question 13

Property rights.

Answer 13

The ability of an individual to own and control scarce resources.

Question 14

Market failure.

Answer 14

A situation in which a market on its own fails to allocate resources efficiently.

Question 15

Externality.

Answer 15

(A cause of market failure.) The impact of one person’s actions on the wellbeing of a bystander.

Question 16

Market power.

Answer 16

(A cause of market failure. AKA cartels) the ability of a single economic actor, or a small group of actors, to unduly influence market prices.

Question 17

How the economy as a whole works.

Answer 17

8. Country’s Standard of living depends on its ability to produce.
9. Prices rise when the government prints too much money.
10. Short-run trade-off between inflation and unemployment.

Question 18

8. How a country’s SOL depends on its ability to produce.

Answer 18

In nations where workers who produce large quantities of goods and services most people will have a high standard of living (SOL), opposite to nations where workers are less productive, whose citizens will have a lower SOL.

Question 19

9. Prices rise when the government prints too much money.

Answer 19

Inflation is mostly caused by the growth in the quantity of one nation’s money. Too much money = money value falls.

Question 20

10. Short-run trade-off between inflation and unemployment.

Answer 20

Inflation and unemployment go in opposite directions.
Inflation = higher prices - higher demand - more jobs.
This constitutes the business cycle

Question 23

2. The cost of something is what you give up to get it.

Answer 23

Compare costs of alternatives. Some costs can include more stuff than it seems.