chapter 1

Question 1

tradeoff

Answer 1

choice between two options, give up one to get the other

Question 2

opportunity cost

Answer 2

cost of option 1 is option two, choice of one option sacrifices the opportunity cost of other other

Question 3

difference between micro and macro economics

Answer 3

micro: individual parts of the economy
macro: looks at the economy as a whole

Question 4

principles of micro economics

Answer 4

1. people face tradeoffs
2. cost of something is what you give up to get it
3. rational people think at the margin
4. people respond to incentives
5. trade can make everyone better
6. markets are a good way to organize economic activity
7. governments can sometimes improve market outcomes

Question 5

principle 1: people face tradeoffs

Answer 5

cost of something is what you give up to get it, try to encourage efficiency and equity

Question 6

efficiency versus equity

Answer 6

efficiency: society gets maximum benefits from scarce resources
equity: prosperity is distributed uniformly throughout societies members
*tradeoffs with one another

Question 7

principle 2: the cost of something is what you give up to get it

Answer 7

requires costs and benefits of alternatives
opportunity cost of item is what is the next best alternative that you give up to obtain the item
choose the item with lowest opp cost

Question 8

principle 3: rational people think at the margin

Answer 8

assume people are rational (make best decisions for themselves
marginal: extra/additional
to be rational has to be higher or equal to marginal cost, irrational if below

Question 9

principle 4: people respond to incentives

Answer 9

rational people make decisions by comparing costs and benefits, induces a person to act

Question 10

principle 5: trade can make everyone better off

Answer 10

allow countries to specialize in specific good, lowers costs, greater variety

Question 11

principle 6: markets are a good way to organize economic activity

Answer 11

decentralized, less government control, determined by supply and demand

Question 12

what is the invisible hand

Answer 12

adam smith, prices guide self-interest, maximize societies economic well being, no government intervention

Question 13

principle 7: government sometimes improve market outcome

Answer 13

help avoid market failure if resources are allocated inefficiently, can help avoid market power (single buyer/seller has influence over market)