Chapter 1

Question 1

Scarcity

Answer 1

It is the limited nature of society’s resources.

Question 2

Economics

Answer 2

It is the the study of how society manages its scarce resources.

Question 3

Five How’s of Economics

Answer 3

1. How people decide what to buy,
2. How much to work, save, and spend,
3. How firms decide how much to produce,
4. How many workers to hire,
5. How society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs.

Question 4

Trade-Off

Answer 4

It is when an individual achieve a greater equality.

Question 5

Efficiency

Answer 5

It is when a society gets the most from its scarce resources.

Question 6

Equality

Answer 6

It is when prosperity is distributed uniformly among society’s members.

Question 7

Opportunity Cost

Answer 7

It is any item that must be given up to obtain it.

Question 8

Rational People

Answer 8

These people systematically and purposefully do the best they can to achieve their objectives.

Question 9

Incentives

Answer 9

It is something that induces a person to act.

Question 10

Market

Answer 10

It is a group of buyers and sellers. (Need not be in a single location)

Question 11

Market Economy

Answer 11

It allocates resources through the decentralized decisions of many households and firms as they interact in markets.

Question 12

“Organize Economic Activity” means determining

Answer 12

1. What goods to produce?
2. How to produce them?
3. How much of each to produce?
4. Who gets them?

Question 13

Market Failure

Answer 13

It is when the market fails to allocate society’s resources efficiently.

Question 14

Causes of Market Failure

Answer 14

1. Externalities, when the production or consumption of a good affects bystanders (e.g. pollution).
2. Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly).

Question 15

Productivity

Answer 15

The most important determinant of living standards. It is the amount of goods and services produced per unit of labor. It depends on the equipment, skills, and technology available to workers.

Question 16

Inflation

Answer 16

It is the increase in the general level of prices.

Question 17

Causes of Inflation

Answer 17

Excessive growth in the quantity of money, which causes the value of money to fall. The faster the government creates money, the greater the inflation rate.

Question 18

Two (2) Steps on Problem Solving

Answer 18

1. Figure out what’s causing the problem.
2. How to fix it.

Question 19

Rational-Actor Paradigm

Answer 19

It is a model of behavior that assumes that people act rationally, optimally, and self-interestedly. It is used to analyze behavior and decision-making. It is only a tool for analyzing behavior, not advice on
how to live your life.

Question 20

Incentives

Answer 20

It is created by rewarding good performance with. It must be aligned with the organizational goals.

Question 21

By this we mean that employees have enough information to make good decisions and the incentive to do so.

Answer 21

1. A way of measuring performance.
2. A compensation scheme to reward good (or punish bad) performance.

Question 22

A well-designed organization is one in which employee incentives are aligned with organizational goals. By this we mean that employees have:

Answer 22

1. Enough information to make good decisions.
2. The incentive to do so.

Question 23

Three (3) Questions to Ask to Them

Answer 23

Q1: Who made the bad decision?
Q2: Does the decision maker have enough information to make a good decision?
Q3: Does the decision maker have the incentive to make a good decision?

Question 24

Three (3) Solutions to Answer to Them

Answer 24

S1: Let someone else make the decision, someone with better information or incentives.
S2: Give the decision maker more information.
S3: Change the decision maker’s incentives.

Question 25

It Requires Two (2) Steps

Answer 25

1. Figure out why people are making mistakes.
2. Figure out how to prevent future ones.

Question 26

A Bad Decision Occurs Either of One (1) of the Two (2) Reasons:

Answer 26

1. Decision makers do not have enough information to make a good decision.
2. They lack incentives to do so.

Question 27

Ethics & Economics

Answer 27

A debate is really a debate between value systems, it becomes much easier to understand opposing points of view, and to reach a compromise with your adversaries.

Question 28

Deontologist

Answer 28

It judges actions as good or ethical by whether they conform to a set of principles, like the Ten Commandments.

Question 29

Consequentialists

Answer 29

It judges actions by their consequences.

Question 30

Economics Gives us Consequentialist

Answer 30

Understanding of the practice by comparing high prices to the implied
alternative. (If prices do not rise, the consequences would be excess demand)