Chapter 1 (1)

Question 1

What is economics?

Answer 1

–> is the study of how people manage resources

-Decisions made by individuals and also by groups
○ Groups = include families, firms, governments, and other organizations

Question 2

Resources

Answer 2

Physical objects - cash, land, and gold mines

Intangibles things - time, ideas, technology, job experience, and even personal relationships

Question 3

Microeconomics

Answer 3

Study of how individuals and firms = manage resources (how they make decisions + how they interact in specific markets)

Question 4

Macroeconomics

Answer 4

Study of the economy on a regional, national, or international scale

> study of economy-wide phenomena (including inflation, unemployment, and economic growth).

Question 5

RATIONAL PEOPLE

Answer 5

• systematically & purposely do the best they can to achieve their objectives, given the opportunities they have.

> They know that decisions in life = rarely black & white –> but usually involve shades of grey

Example:
when exams roll around, your decision is not between blowing them off or studying 24 hours a day (black-and-white) –> but whether to spend an extra hour reviewing your notes instead of watching TV

Question 6

MARGINAL CHANGES

Answer 6

describes small incremental adjustments to an existing plan of action

► Rational people = often make decisions by comparing marginal benefits & marginal costs
► Marginal benefit > marginal cost (will prompt them)

Question 7

SCARCITY

Answer 7

society has limited resources & therefore cannot produce all the goods and services people wish to have.

► Each individual in a society = cannot attain the highest standard of living to which he or she might aspire

Question 8

SCARCITY (stakeholders)

Answer 8

► Individuals’ resources: time and money.

►Societies’ resources: factors of production, such as labour and technology.

Therefore, you would have to compromise…to meet your wants.

Question 9

INCENTIVE

Answer 9

is something (such as the prospect of a punishment or a reward) that includes a person to act

► b/c rational people make decisions by comparing costs & benefits, they respond to incentives

►Incentives = crucial to analyzing how markets work.

Question 10

Positive incentive

Answer 10

Makes people more likely to do something by lowering their opportunity cost.

Question 11

Negative incentive (disincentive)

Answer 11

Makes people less likely to do something by raising their opportunity cost.

Question 12

EFFICIENCY

Answer 12

the property of society getting the most it can from its scarce resources (size of the economic pie)

Question 13

EQUITY

Answer 13

the property of distributing economic prosperity fairly among the members of society (how the pie is divided into individual sizes)

Question 14

OPPORTUNITY COST

Answer 14

of an item = what you GIVE UP to get that item

►When making any decision, decision makers should be aware of the opportunity cost that accompany each possible action

►An opportunity cost = an opportunity lost

Question 15

(List). Sometimes economies do not operate efficiently.

Answer 15

• innovation
• market failure
• intervention

Question 16

MARKET ECONOMY

Answer 16

an economy that allocates resources through the decentralized decisions of many firms & households as they interact in markets for goods & services

► Firms decide whom to hire & what to make

►Households decide which firms to work for & what to buy w/ their incomes
-These firms & households interact in the marketplace –> where prices and self-interest guide their decisions

Question 17

Invisible hand & market intervention

Answer 17

if the invisible hand = so great, why do we need government?

► The invisible hand can work its magic only if the government enforces the rules & maintains the institutions that are key to a market economy

►Most important, market economies = need institutions to enforce property rights–so individuals can own & control scarce resources

► The invisible hand is powerful –> but it is omnipotent

Question 18

(2) REASONS FOR A GOV’T TO INTERVENT IN THE ECONOMY & CHANGE THE ALLOCATION OF RESOURCES THAT PEOPLE WOULD CHOOSE ON THEIR OWN:

Answer 18

1. To promote efficiency
   
   2. To promote equity

► That is, most policies = aim either to enlarge the economic pie or to change how the pie is divided

Question 19

MARKET FAILURE

Answer 19

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

► One possible cause of market failure is externality.

Question 20

EXTERNALITY

Answer 20

the impact of one person’s actions on the well-being of a bystander
Example: Pollution. -market left on it’s own may fail to take the cost of others’ health into consideration

► Another possible cause of market failure = market power

Question 21

MARKET POWER

Answer 21

ability of a single person or firm (or a small group) to unduly influence market prices

Example: if there’s only one well, the owner can charge higher prices b/c it is needed and not subjected to any competition.

► Therefore, in the presence of externalities or market power –> well-designed public policy can enhance economic efficiency