Ch 1: 5 Foundations of Economics

Question 1

Scarcity

Answer 1

refers to the limited nature of society’s resources, given society’s unlimited wants and needs

Question 2

Economics

Answer 2

the study of how people allocate their limited resources. How people make choices

Question 3

the study of economics is divided into two fields and difference

Answer 3

microeconomics and macroeconomics;
Difference between a mico and macro issue is that micro is an individual’s decision while macro is an observation of economy

Question 4

Microeconomics

Answer 4

the study of the individual (units) that make up the economy

Question 5

Macroeconomics

Answer 5

the study of the overall aspects and workings of an economy, such as inflation, growth, employment,interest rates, and the productivity of the economy as a whole

Question 6

The five foundations of economics are:

Answer 6

incentives;
trade-offs;
opportunity cost;
marginal thinking;
the principle that trade creates value

Question 7

Incentives

Answer 7

reward or penalty that motivate you to act (or to exert effort)

Question 8

Positive incentives

Answer 8

those that encourage action with positive reward (bonus at work; Work harder)

Question 9

Negative incentives

Answer 9

a penalty that spurs individuals to action ( fear of speed ticket if you speed or brush teeth regularly so no trip to dentist)

Question 10

Direct incentives

Answer 10

absolute and easy to recognize (Cut my grass and I’ll pay you $30)

Question 11

Indirect incentives

Answer 11

It is the byproduct behavior of the direct incentive that changes behavior of benefit consumer, but not supplier

Question 12

unintended consequences

Answer 12

the repercussions and aftermath unintended from said incentives (get baby bonus from gov. for babies born after July 1. couples delay births so they can get that bonus. this is the unintended consequence)

Question 13

Trade off

Answer 13

Given limited resources(time; money; energy), there is a compromise when a choice is made. (Going to school instead of working) (pg 12)

Question 14

Opportunity cost

Answer 14

The highest-valued alternative that must be sacrificed once a choice is made. The key to making the best possible decision is to minimize your opportunity cost by selecting the option that gives you the largest benefit (if you prefer concert over hiking and both are your options, then the hiking is your low opportunity cost since not going to concert is a high opportunity cost)

Question 15

Marginal thinking

Answer 15

requires decision-makers to evaluate whether the benefit of one more unit outweigh its cost (pg15) Its Cost/Benefit analysis

Question 16

Trade

Answer 16

voluntary exchange of goods and services between two or more parties. Voluntary trade among rational individuals creates value for everyone involved

Question 17

Comparative advantage

Answer 17

refers to the situation in which one (individual, business, or country) can produce at a lower opportunity cost than a competitor can. Specializing lowers ones opportunity cost

Question 18

Economic Thinking

Answer 18

an intentional evaluation of the available opportunities to make the best decision possible

Question 19

Markets

Answer 19

a system that brings buyers and sellers together to exchange goods and services. (Think Ebay)

Question 20

Barter

Answer 20

the trade of a good or service without using traditional currency