Chapter 1 (Basic Principles)

Question 1

Scarcity

Answer 1

The problem that arises from our limited MONEY, TIME, & ENERGY

Question 2

Economics

Answer 2

How individuals, businesses, & governments make the BEST POSSIBLE CHOICE to get what they want & how those choices interact in markets

Question 3

Opportunity Cost

Answer 3

The cost of the BEST ALTERNATIVE given up.
What you give>what you give up

Equation: Give up/ get

Opportunity costs is the key to mutual benefits of TRADE.

Question 4

Incentives

Answer 4

REWARDS & PENALTIES for choice

People respond to economic incentives by taking advantage of opportunities to make themselves better off.

Ex: women have a LARGER incentive than men when it comes to post-secondary studies

Question 5

Voluntary Exchange

Answer 5

When one trades a product for money

Question 6

Production Possibilities Frontier (PPF)

Answer 6

Shows the MAXIMUM combos for products or services that can be produced with existing inputs.

Demand: maximum price people are WILLING & ABLE to pay

Question 7

Absolute Advantage

Answer 7

The ability to produce a product or service at a lower absolute cost then another producer… if 1 person is better in EVERYTHING

Question 8

Comparative Advantage

Answer 8

The ability to produce a product or service at a lower OPPORTUNITY COST than another producer

Question 9

Specialization

Answer 9

According to comparative advantage and trade… allows each trader to consumer outside ones PPF and allows for lower opportunity cost

Question 10

Input Markets

Answer 10

Households are Sellers (HS)

Businesses are Buyers (BB)

Question 11

Output Markets

Answer 11

Households are Buyers (HB)
Businesses are Sellers (BS)

Question 12

3 sets of players in the Circular Flow Model (C.F.M)

Answer 12

Governments
Houses
Businesses

Question 13

Positive Statements

Answer 13

Claims about how the world IS

FACTS

Can be tested and is verifiable

Question 14

Normative Statements

Answer 14

Claims about how the world SHOULD/OUGHT/GOOD IDEA/BAD IDEA to be

OPINIONS

Question 15

Microeconomics

Answer 15

Analyzes choices that individuals in households, businesses and government make and h these choices interact in markets

SMALLER LENSE

Question 16

Macroeconomics

Answer 16

Analyzes performance of the whole Canadian and GLOBAL economy, the combined outcomes of all individual micro choices

LARGER LENSE

Question 17

Marginal Benefits (DEMAND)

Answer 17

• ADDITIONAL benefits from the next best choice
• Flat fees DO NOT equal additional costs… and should NOT influence how much food you eat at a buffet

Price depends on the MB not TB
Ex (diamond/water paradox):
Diamonds= high MB and low TB
Water= low MB and high TB

Question 18

Marginal Opportunity Costs (SUPPLY)

Answer 18

• Additional O.C from the next best choice
• the marginal costs a business pays for an input is an O.C
• spending more time in any activity INCREASES marginal O.C

Ex: sunk costs DO NOT equal O.C and have 0 influence on making a smart choice

Question 19

Implicit costs

Answer 19

• HIDDEN opportunity costs of what business owners could earn elsewhere with time and money invested
• NON-MONETARY: not related to money

Ex: wages and salaries paid to workers, loss of interest income,

Question 20

Explicit costs

Answer 20

• costs a business pays DIRECTLY. Accounts count all obvious business costs and include depreciation
• MONETARY: spending actual money $$$$$$

Ex: mortgage, rent, utilities, advertisements, raw materials… etc

Question 21

Negative Externalities

Answer 21

• imposes a COST on innocent ppl
• the PRIVATE cost is endured by the producer of the good (supply curve)
• the SOCIAL costs if the full costs, including private and external cost

Marginal social cost curve (MSC): includes all private and external costs in a transaction

Question 22

Positive Externality

Answer 22

• creates a BENEFIT for innocent ppl
• the PRIVATE benefit is received by the consumer of the good (demand curve)
• the SOCIAL benefit includes the private and external benefit

Marginal social benefit curve (MSB): includes all private and external benefits in a transaction.

Question 23

Efficiency

Answer 23

• Positive efficiency: maximizing output at the LOWEST possible cost (attainable vs unattainable)
• Allocative efficiency: production represents consumer preferences

Question 24

Equality (equity)

Answer 24

The fair distribution of economic benefits