Chapter 1 Flashcards
CH1 What are the four principles of individual dicision-making and explain them?
(1) People face tradeoffs: to GET ONE THING they like, they have to GIVE UP ANOTHER THING they like.
(2) The cost of something is what you give up to get it: not just in terms of monetary costs but all opportunity costs.
(3) Rational people think at the margin: rational people will take an action if and only if the marginal BENEFITS EXCEED the marginal COSTS.
(4) People respond to incentives: because they compare BENEFITS to COSTS, their behavior may change when the costs or benefits change.
#CH1 What are the three principles concerning economic interactions and explain them?
(1) Trade can make everyone better off:
+ Countries can SPECIALIZE IN what they DO BEST.
+ Enjoy a wider variety of GOODS and SERVICES.
(2) Markets are usually a good way to organize economic activity: The INVISIBALE HAND leads
markets to DESIRABLE OUTCOMES.
(3) Governments can sometimes improve market outcomes: because sometimes markets FAIL to ALLOCATE RESOURCES efficiently because of an externality or market power.
#CH1 What are three principles that describe how the economy as a whole works and explain them?
(1) A country’s standard of living depends on its ability to produce goods and services:
(2) Prices rise when the government prints too much money: MORE money in circulation REDUCES the value of money, causing INFLATION.
(3) Society faces a short-run tradeoff between inflation
and unemployment: only TEMPORARY and policymakers can exploit this relationship using
various policy instruments.
CH1 What is an EXTERNALITY?
The IMPACT of one person’s ACTIONS on
the well-being of a bystander.
CH1 What is MARTKET POWER?
The ABILITY of a single person
(or small group of people) to have a
substantial INFLUENCE on market prices.
CH1 What is inflation, and what causes it?
- An INCREASE in the overall level of PRICES in the economy.
- Inflation is caused by increases in the quantity of a nation’s money.
CH1 Three examples of important tradeoffs that you face in your life.
- I had to choose 4 accounting subjects out of ten available ones (time tradeoffs)
- I considered spending $120 on an accounting book or a new pair of shoes. (spending tradeoffs).
- In my last holiday, I wondered whether I should work to earn money or come back to my country.
CH1 What is the opportunity cost of seeing a movie?
- The MONETARY COST of admission (tickets)
- The TIME COST to the theater depends on…
+ Staying at home (the time cost is small)
+ Working extra 3 hours (the time cost is the money you could earn).
#CH1 Water is necessary for life. Is the marginal benefit of a glass of water large or small?
It depends on your circumstances.
+ If you’ve just run a marathon (the marginal benefit is vey high)
+ If you’ve been drinking a lot of liquids recently (the marginal benefit is quite low).
The point is that even the NECESSITIES of life, like water, DON’T ALWAYS have large marginal benefits.
CH1 What is marginal benefit?
A MARGINAL BENEFIT the additional satisfaction or UTILITY that a person receives from consuming an additional unit of a good or service.
A person’s MARGINAL BENEFIT is the maximum amount he is willing to pay to consume that additional unit of a good or service.
CH1 Why should policymakers think about incentives?
So they can understand how people will RESPOND to
the POLICIES they put in place.
The text’s example of seat belts shows that policy actions can have quite unintended consequences.
CH1 Why isn’t trade among countries like a game with some winners and some losers?
It isn’t a game….since: Trade can make everyone better off:
+ Countries can SPECIALIZE IN what they DO BEST.
+ Enjoy a wider variety of GOODS and SERVICES.
+ Trade (between people and trade between
countries) can improve everyone’s welfare.
CH1 What does the “invisible hand” of the marketplace do?
The idea is that even though individuals and firms are all acting in their OWN SEFT-INTEREST, prices and the marketplace guide them to do what is
GOOD for society as a whole.
CH1 TWO main causes of MARKET FAILURE and give examples.
1/ An EXTERNALTY is the IMPACT of one person’s actions on the WELL-BEING of a bystander (pollution or the creation of knowledge).
2/ MARKET POWER refers to the ability of a single person (or small group of people) to UNDULY influence market price (in a town with only one well or only one cable television company).
CH1 Why is productivity important?
Because a country’s STANDARD Of LIVING depends on its ability to produce goods and services.
This means that the increasing productivity leads to an increase in a country’s standard of living.
