Chapter 1

Question 1

Scarcity

Answer 1

our inability to get everything we want

Question 2

Incentive

Answer 2

a reward that encourages an action of a penalty that discourages one

• Prices act as incentives. If the price of a laptop is too high, more will be offered for sale than people want to buy. And if the price is too low, fewer will be offered for sale than people want to buy.

Question 3

Economics

Answer 3

the social science that studies choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices

Question 4

Microeconomics

Answer 4

the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments

Question 5

Macroeconomics

Answer 5

the study of the performance of the national economy and the global economy

Question 6

Two Big Economic Questions

Answer 6

• How do choices end up determining what, how, and for whom goods and services are produced?
• Do choices made in the pursuit of self-interest also promote social interest?

Question 7

Goods and services (What, How, and for Whom?)

Answer 7

the objects that people value and produce to satisfy wants.

Question 8

Goods

Answer 8

physical objects such as cellphones and automobiles

Question 9

Services

Answer 9

are tasks performed for people such as cellphone service and auto-repair service

Question 10

How we produce is described by _________

Answer 10

How we produce is described by the technologies and resources that we use

Question 11

Factors of production

Answer 11

The productive resources used to produce goods and services

Question 12

Factors of production - Grouped into 4 categories

Answer 12

Land

Labour

Capital

Entrepreneurship

Question 13

Land (Factors of production)

Answer 13

the “gifts of nature” that we use to produce goods and services (natural resources)

It includes land in the everyday sense together with minerals, oil, gas, coal, water, air, forests, and fish.

Question 14

Labour (Factors of production)

Answer 14

the work time and work effort that people devote to producing goods and services

Labour includes the physical and mental efforts of all the people who work on farms and construction sites and in factories, shops, and offices.

Question 15

Capital (Factors of production)

Answer 15

the tools, equipment, buildings, and other constructions that businesses use to produce goods and services

Question 16

Human Capital

Answer 16

the knowledge and skill that people obtain from education, on-the-job training, and work experience

You are building your own human capital right now as you work on your economics course, and your human capital will continue to grow as you gain work experience.

Question 17

Financial Capital

Answer 17

money, stocks, and bonds

Financial capital plays an important role in enabling businesses to borrow the funds that they use to buy physical capital. But financial capital is not used to produce goods and services and it is not a factor of production.

Question 18

Entrepreneurship (Factors of production)

Answer 18

the human resource that organizes the other three factors of production: labour, land, and capital

Entrepreneurs are the drivers of economic progress. They develop new ideas about what and how to produce, make business decisions, and bear the risks that arise from these decisions.

Question 19

Who consumes the goods and services that are produced _______________

Answer 19

Who consumes the goods and services that are produced depends on the incomes that people earn.

People with large incomes can buy a wide range of goods and services. People with small incomes have fewer options and can afford a smaller range of goods and services.

Question 20

Land earns ____

Answer 20

Land earns rent.

Question 21

Labour earns _____

Answer 21

Labour earns wages.

Question 22

Capital earns _____

Answer 22

Capital earns interest.

Question 23

Entrepreneurship earns ____

Answer 23

Entrepreneurship earns profit.

Question 24

Which factor of production earns the most income?

Answer 24

Labour

Question 25

The 20 percent of people with the lowest incomes earn about __ percent of total income, while the richest __ percent earn close to 50 percent of total income

Answer 25

The 20 percent of people with the lowest incomes earn about 5 percent of total income, while the richest 20 percent earn close to 50 percent of total income

Question 26

Self-interest

Answer 26

the choices that you think are the best ones available for you are choices made in your self-interest

All the choices that people make about how to use their time and other resources are made in the pursuit of self-interest.

When you allocate your time or your budget, you do what makes the most sense to you. You might think about how your choices affect other people and take into account how you feel about that, but it is how you feel that influences your choice. You order a home-delivery pizza because you’re hungry, not because the delivery person needs a job. And when the pizza delivery person shows up at your door, he’s not doing you a favour. He’s pursuing his self-interest and hoping for a tip and another call next week.

Question 27

Social interest

Answer 27

choices that are the best ones for society as a whole

Ted, an entrepreneur, creates a new business. He hires a thousand workers and pays them $20 an hour, $1 an hour more than they earned in their old jobs. Ted’s business is extremely profitable and his own earnings increase by $1 million per week.

You can see that Ted’s decision to create the business is in his self-interest—he gains $1 million a week. You can also see that for Ted’s employees, their decisions to work for Ted are in their self-interest—they gain $1 an hour (say $40 a week). And the decisions of Ted’s customers must be in their self-interest, otherwise they wouldn’t buy from him. But is this outcome in the social interest?

The economist’s answer is “Yes.” It is in the social interest because it makes everyone better off. There are no losers.

Question 28

Efficient

Answer 28

resources use is efficient if it is not possible to make someone better off without making someone else worse off.

If it is possible to make someone better off without making anyone worse off, society can be made better off and the situation is not efficient.

Question 29

Fair Shares and the Social Interest - example

Answer 29

I put $100 on the table and tell someone you don’t know and who doesn’t know you to propose a share of the money between the two of you. If you accept the proposed share, you each get the agreed upon shares. If you don’t accept the proposed share, you both get nothing.

It would be efficient—you would both be better off—if the proposer offered to take $99 and leave you with $1 and you accepted that offer.

But would you accept the $1? If you are like most people, the idea that the other person gets 99 times as much as you is just too much to stomach. “No way,” you say and the $100 disappears. That outcome is inefficient. You have both given up something.

When the game I’ve just described is played in a classroom experiment, about half of the players reject offers of below $30.

So fair shares matter. But what is fair? There isn’t a crisp definition of fairness to match that of efficiency. Reasonable people have a variety of views about it. Almost everyone agrees that too much inequality is unfair.

Question 30

Four issues in today’s world put some flesh on these questions. The issues are:

Answer 30

Globalization

Information-age monopolies

Climate change

Economic instability

Question 31

Globalization

Answer 31

the expansion of international trade, borrowing and lending, and investment.

When Nike produces sports shoes, people in Malaysia get work; and when China Airlines buys new regional jets, Canadians who work at Bombardier build them. While globalization brings expanded production and job opportunities for some workers, it destroys many Canadian jobs. Workers across the manufacturing industries must learn new skills or take service jobs, which are often lower-paid, or retire earlier than previously planned.

Question 32

Globalization is in the self-interest of those consumers who buy _________ produced in other countries; and it is in the self-interest of the multinational firms that produce in ___________

Answer 32

Globalization is in the self-interest of those consumers who buy low-cost goods and services produced in other countries; and it is in the self-interest of the multinational firms that produce in low-cost regions and sell in high-price regions.

Question 33

Information-Age Monopolies - information

Answer 33

For many years, Windows was the only available operating system for the PC. The PC and Mac competed, but the PC had a huge market share.

An absence of competition gave Microsoft the power to sell Windows at prices far above the cost of production. With lower prices, many more people would have been able to afford and buy a computer.

The information revolution has clearly served your self-interest: It has provided your cellphone, laptop, loads of handy applications, and the Internet. It has also served the self-interest of Bill Gates who has seen his wealth soar.

But did the information revolution best serve the social interest? Did Microsoft produce the best possible Windows operating system and sell it at a price that was in the social interest? Or was the quality too low and the price too high?

Question 34

Climate Change

Answer 34

Every day, when you make self-interested choices to use electricity and gasoline, you leave your carbon footprint. You can lessen this footprint by walking, riding a bike, taking a cold shower, or planting a tree.

But can each one of us be relied upon to make decisions that affect the Earth’s carbon-dioxide concentration in the social interest? Must governments change the incentives we face so that our self-interested choices are also in the social interest? How can governments change incentives? How can we encourage the use of wind and solar power to replace the burning of fossil fuels that brings climate change?

Question 35

Economic Instability

Answer 35

In 2008, U.S. banks were in trouble. They had made loans that borrowers couldn’t repay and they were holding securities the values of which had crashed.

Banks’ choices to take deposits and make loans are made in self-interest, but does this lending and borrowing serve the social interest? Do banks lend too much in the pursuit of profit?

When U.S. banks got into trouble in 2008, the U.S. Federal Reserve (the Fed) bailed them out with big loans backed by taxpayer dollars. Did the Fed’s bailout of troubled banks serve the social interest? Or might the Fed’s rescue action encourage banks to repeat their dangerous lending in the future?

Question 36

Market capitalism

Answer 36

Market capitalism is an economic system in which individuals own land and capital and are free to buy and sell land, capital, and goods and services in markets.

Question 37

Centrally planned socialism

Answer 37

Centrally planned socialism is an economic system in which the government owns all the land and capital, directs workers to jobs, and decides what, how, and for whom to produce.

Question 38

Our economy today is a ____________, which is market capitalism with government regulation.

Answer 38

Our economy today is a mixed economy, which is market capitalism with government regulation.

Question 39

We’re going to look at six key ideas that define the economic way of thinking. These ideas are:

Answer 39

A choice is a tradeoff.

People make rational choices by comparing benefits and costs.

Benefit is what you gain from something.

Cost is what you must give up to get something.

Most choices are “how-much” choices made at the margin.

Choices respond to incentives.

Question 40

Tradeoff

Answer 40

an exchange—giving up one thing to get something else

When you choose how to spend your Saturday night, you face a tradeoff between studying and hanging out with your friends.

Question 41

Rational Choice

Answer 41

a choice that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice

Only the wants of the person making a choice are relevant to determine its rationality

Question 42

Benefit

Answer 42

the benefit of something is the gain or pleasure that it brings and is determined by preferences

Some benefits are large and easy to identify, such as the benefit that you get from being in school. A big piece of that benefit is the goods and services that you will be able to enjoy with the boost to your earning power when you graduate. Some benefits are small, such as the benefit you get from a slice of pizza.

Economists measure benefit as the most that a person is willing to give up to get something. You are willing to give up a lot to be in school. But you would give up only an iTunes download for a slice of pizza.

Question 43

Preferences

Answer 43

what a person likes and dislikes and the intensity of these feelings

Question 44

Opportunity Cost

Answer 44

the highest-valued alternative that we must give up to get something

Example: the opportunity cost of school—all the good things you can’t afford and don’t have the spare time to enjoy because you are in school

Another working of the definition: the loss of potential gain from other alternatives when one alternative is chosen

Question 45

Difference between Opportunity Cost and Tradeoffs

Answer 45

Trade-offs create opportunity costs, one of the most important concepts in economics. Whenever you make a trade-off, the thing that you do not choose is your opportunity cost. To butcher the poet Robert Frost, opportunity cost is the path not taken (and that makes all the difference). You bought that bike? Then the snowboard was your opportunity cost. Decided to work on the Fourth of July? Your opportunity cost was a relaxing day hanging out with the fam at the BBQ.

Question 46

Margin

Answer 46

when a choice is made by comparing a little more of something with its cost, the choice is made at the margin

You can allocate the next hour between studying and chatting online with your friends, but the choice is not all or nothing. You must decide how many minutes to allocate to each activity. To make this decision, you compare the benefit of a little bit more study time with its cost—you make your choice at the margin.

Question 47

Marginal Benefit

Answer 47

the benefit that arises from an increase in an activity

For example, your marginal benefit from one more night of study before a test is the boost it gives to your grade. Your marginal benefit doesn’t include the grade you’re already achieving without that extra night of work.

Question 48

Marginal Cost

Answer 48

the opportunity cost of an increase in an activity

For you, the marginal cost of studying one more night is the cost of not spending that night on your favourite leisure activity.

Question 49

To make your decisions, you compare marginal benefit and marginal cost. If the marginal ______ from an extra night of study exceeds its marginal ______, you study the extra night. If the marginal ______ exceeds the marginal ______, you don’t study the extra night.

Answer 49

To make your decisions, you compare marginal benefit and marginal cost. If the marginal benefit from an extra night of study exceeds its marginal cost, you study the extra night. If the marginal cost exceeds the marginal benefit, you don’t study the extra night.

Question 50

Self-interested actions are not necessarily ________. You might decide to use your resources in ways that bring pleasure to others as well as to yourself. But a self-interested act gets the most benefit for you based on your view about benefit.

Answer 50

Self-interested actions are not necessarily selfish actions. You might decide to use your resources in ways that bring pleasure to others as well as to yourself. But a self-interested act gets the most benefit for you based on your view about benefit.

Question 51

The central idea of economics is that we can predict the self-interested choices that people make by looking at the ______ they face.

Answer 51

The central idea of economics is that we can predict the self-interested choices that people make by looking at the incentives they face. People undertake those activities for which marginal benefit exceeds marginal cost; and they reject options for which marginal cost exceeds marginal benefit.

For example, your economics instructor gives you a problem set and tells you these problems will be on the next test. Your marginal benefit from working these problems is large, so you diligently work them. In contrast, your math instructor gives you a problem set on a topic that she says will never be on a test. You get little marginal benefit from working these problems, so you decide to skip most of them.

Question 52

Positive Statements

Answer 52

A positive statement is about what is.

It says what is currently believed about the way the world operates. A positive statement might be right or wrong, but we can test it by checking it against the facts. “Our planet is warming because of the amount of coal that we’re burning” is a positive statement.

We can test whether it is right or wrong.

Question 53

Normative Statements

Answer 53

A normative statement is about what ought to be.

It depends on values and cannot be tested. Policy goals are normative statements. For example, “We ought to cut our use of coal by 50 percent” is a normative policy statement.

You may agree or disagree with it, but you can’t test it. It doesn’t assert a fact that can be checked.

Question 54

Economic model

Answer 54

An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand.

For example, an economic model of a cellphone network might include features such as the prices of calls, the number of cellphone users, and the volume of calls. But the model would ignore cellphone colours and ringtones.

Question 55

A model is tested by comparing its _____ with the _____. But testing an economic model is difficult because we observe the outcomes of the ____________________.

Answer 55

A model is tested by comparing its predictions with the facts. But testing an economic model is difficult because we observe the outcomes of the simultaneous change of many factors.

To cope with this problem, economists look for natural experiments (situations in the ordinary course of economic life in which the one factor of interest is different and other things are equal or similar); conduct statistical investigations to find correlations; and perform economic experiments by putting people in decision-making situations and varying the influence of one factor at a time to discover how they respond.

Question 56

Ceteris paribus

Answer 56

Ceteris paribus (often shortened to cet par) means “if all other relevant things remain the same.”