Chapter 1

Question 1

The word economy comes from the Greek word for

Answer 1

“one who manages a household.”

Question 2

The management of society’s resources (eg. people, land, buildings, machinery) is important because

Answer 2

resources are scarce

Question 3

what is the definition of scarcity

Answer 3

the limited nature of society’s resources

Question 4

what is the definition of economics

Answer 4

the study of how society manages its scarce resources

Question 5

Principle #1: people face tradeoffs

Answer 5

there is no such thing as a free lunch

Question 6

what is efficiency

Answer 6

the property of society getting te mot it can from its scarce resources

Question 7

what is equity

Answer 7

the property of distributing economic prosperity fairly among the members of society

Question 8

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

Answer 8

whatever must be given up to obtain some item

Question 9

Principle #3: rational people think at the margin

what are rational people:

Answer 9

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

Question 10

what is marginal changes

Answer 10

small incremental adjustments to a plan of action

Question 11

Principle #4: people respond to incentives

what is an incentive

Answer 11

something tat induces a person to act

Question 12

You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired or sell the car “as is.”
In each of the following scenarios, should you have the transmission repaired? Explain.
A. Blue Book value is $6500 if the transmission works and$5700 if it doesn’t,
B. Blue Book value is $6000 if the transmission works, $5500 if it doesn’t.

Answer 12

Cost of fixing transmission = $600
A. Blue Book value is $6500 if the transmission works, $5700 if it doesn’t.
Benefit of fixing the transmission = $800 ($6500 – $5700).
It’s worthwhile to have the transmission fixed.
Blue Book value is $6000 if the transmission works, $5500 if it doesn’t.
Benefit of fixing the transmission is only $500
Paying $600 to fix the transmission is not worthwhile.
Observations:
The $1000 you previously spent on repairs is irrelevant. What matters is the cost and benefit of the marginal repair (the transmission).
The change in incentives from scenario A to scenario B caused your decision to change.

Question 13

Principle #5: trade can make everyone better off

what are property rights

Answer 13

the ability of an individual to won and exercise control over scarce resources

Question 14

principle 6: markets are usually a good way to organize economic activity
what is market economy

Answer 14

an economy that allocates resources throught he decentralized decisions of many firms and households as they interact in markets for goods and services

Question 15

Principle 6: markets are usually a good way to organize economic activity (continued)
what did Adam Smith Observe

Answer 15

In his 1776 book, Adam Smith observed that households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes.

Question 16

Principle 7: governments can sometimes improve market outcomes
we need governments for two reasons, what are they?

Answer 16

1. enforce property rights

2. because the individual hand is powerful, but it is not omnipotent

Question 17

there are two broad reasons for a government to intervene in the economy

Answer 17

1. The goal of efficiency

2. The goal of equity

Question 18

For each of the following situations, what is the government’s role? Does the government’s intervention improve the outcome?
Public schools for K-12
Workplace safety regulations
Public highways
Patent laws, which allow drug companies to charge high prices for life-saving drugs

Answer 18

?

Question 19

The goal of efficency

1. market failure (what is it)
2. externality (what is it)?

Answer 19

Market failure: a situation in which a market left on its own fails to allocate resources efficently

externality:
the impact of one perosn’s actions on the well-being of a bystander

Question 20

what is the goal of equity

Answer 20

Even when the invisible hand is yielding efficient outcomes, it can nonetheless leave sizable disparities in economic well-being

Question 21

Why is a country better off not isolating itself from all other countries?

Why do we have markets and, according to economists, what roles should government play in them?

Answer 21

?

Question 22

principle 8: a country’s stand of living depends on its ability to produce goods and services
what is productivity

Answer 22

the quantity of goods and services produced form each hour of a worker’s time

Question 23

Principle #9: Prices Rise When the Government Prints Too Much Money

what is inflation

Answer 23

an increase in the overall level of prices in the economy

Question 24

what causes inflation

Answer 24

?

Question 25

Principle #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment
This short-run tradeoff plays a key role in the analysis of the business cycle.

what is the business cycle

Answer 25

Business cycle: the irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed

Question 26

The social science of economics exists because of two key facts

Answer 26

First, our demands or wants for goods and services appear to be virtually unlimited. Second, the resources at our disposal that may be used to meet those unlimited wants are themselves limited.

Question 27

Why are economic choices inevitable

Answer 27

because resources are scarce

Question 28

what is economics concerned with

Answer 28

how we go about making such choices and how we can ensure that `we use our resources efficiently

Question 29

what are society’s resources

Answer 29

people, land buildings and machinery

Question 30

Economists study what

Answer 30

1. how people make decisions (how much they work, what they buy, how much they save, how much they invest)
2. how people interact with each other
3. analyze forces and trends that affect the economy as whole, including growth in average income, the fraction of the population that cannot work, and the rate at which prices are rising

Question 31

what does the marginal benefit depend on

Answer 31

how many units a person already has

water vs diamonds

Question 32

a rational decision maker takes and action if and only if what

Answer 32

the marginal benefit of the action exceeds the marginal cost

Question 33

What is marginal cost

Answer 33

Actual costs involved

Question 34

What is marginal benefit

Answer 34

Depends on how much the person already has

• water is plentiful so the marginal benefit of a glass of water is small
• diamonds are rare so the marginal benefit of a diamond is large