Chapter 1: Book Outline

Question 1

Essence of economic way of thinking is to

Answer 1

understand how incentives and institutions affect people’s behavior.

Question 2

When outcome is undesirable, ask these 3 questions:

Answer 2

1. Who made the bad decision?
2. Did they have the information they needed?
3. Did they have the right incentives?

When it is identified who made decision, we can understand circumstances in which the decision was made and what objectives were.

Question 3

Methodological Individualism

Answer 3

The doctrine that all social phenomena (Their structure and their change) are in principle explicable only in terms of individuals - their properties, goals and beliefs. (Jon Elster)

Question 4

There is a _____ between individuals and institutions.

Answer 4

Feedback mechanisms

Question 5

Institutions

Answer 5

collective action in control, liberation and expansion of individuals actions

Question 6

Two key behavior assumptions

Answer 6

1. The rationality assumption - incentives affect behavior (at the margin)
2. The self interest assumption - people pursue their own self interest

Question 7

Goal of Management

Answer 7

to change behavior you need to change what is in people’s self interest to pursue; Change incentives

Question 8

Positive Analysis

Answer 8

refers to what is

Question 9

Normative Analysis

Answer 9

Refers to what ought to be

Question 10

Economists limit themselves to _____ about society.

Answer 10

making positive claims

Question 11

When you move from positive to normative, _______

Answer 11

ethical and moral opinions are introduced

Question 12

Managerial Individualism

Answer 12

Idea that all corporate phenomena emerge from the actions and interactions of individual employees who are making choices in response to expected additional costs and benefits as they perceive them

Question 13

Incentives are not an objective fact but a

Answer 13

subjective interpretation

Question 14

To understand public policy the decision maker is the

Answer 14

politician

Question 15

To understand management, the decision maker is the

Answer 15

manager

Question 16

To understand consumer theory focus on the

Answer 16

consumer

Question 17

Consumer sovereignty

Answer 17

Implies that firms should bend over backwards to satisfy the whims of their customers. Means is that ina market economy, it is consumers who decide upon how resources are managed.

Question 18

Value based compensation

Answer 18

paying for specific results achieved rather than hours worked

Question 19

when focus is on value

Answer 19

it is output that matters, not inputs.

Question 20

scarcity

Answer 20

is necessary but not sufficient condition to determine something’s value

Question 21

Value is

Answer 21

subjective and stems from the alleviation of pressing needs

Question 22

We satisfy _______.

Answer 22

our most pressing needs first. It is the alleviation of pressing needs that we ‘value’, not the commodities themselves.

Question 23

Lesson for management is to lead on ____

Answer 23

benefits rather than features. Value of the product derives from the service being provided, not the product itself.

Question 24

First Law of Demand

Answer 24

States that prices and quantity demanded are inversely related.

Question 25

Law of Diminishing Marginal Utility

Answer 25

As consumption of goods increases, the satisfaction derived from consuming more of the good will eventually decline.

Question 26

Utility

Answer 26

our subjectively determined benefits

Question 27

Satiation

Answer 27

refers to the point at which marginal utility becomes zero and total utility stops increasing

Question 28

DMU states that

Answer 28

the more you have of something, the less you value additional units.

Question 29

Rate of DMU will

Answer 29

differ for different goods and we would expect DMU to be more pronounced for perishable or sickly good.

Question 30

Consumer surplus

Answer 30

Demand curve slopes downward

defined as the difference between what you pay for a good or service and the maximum that you would have been willing to pay

Question 31

Demand curves show the relationship between

Answer 31

price and quantity

Question 32

Changes in price affect

Answer 32

quantity demanded

Question 33

Examples of non-price factors that will cause a demand curve to shift include:

Answer 33

1. Income
2. The price of related goods
3. The number of consumers
4. Expectations about future prices
5. Changes in preferences

If any of the above changes, original demand curve becomes outdated.

Question 34

Substitution Effect:

Answer 34

We can switch consumption from other goods

If the price of a good falls it becomes cheaper relative to other goods, therefore we consume more of it.

We substitute or switch from relatively expensive to the relatively cheap.

Question 35

Income Effect

Answer 35

We can afford more

More income may mean we wish to consume more of a good, but it may mean we wish to consume less.

Question 36

Law of DMU tells us that

Answer 36

demand curves will always slope downwards.

Question 37

Elasticity of an economic variable refers to its

Answer 37

responsiveness to changes

Question 38

Price elasticity refers to the response of

Answer 38

quantity demanded to changes in price and reflects the slope of the demand curve.

Question 39

How to calculate the price elasticity of demand

Answer 39

Divide the percentage change in quantity demanded by the percentage change in price. This will yield a negative number (due to first law of demand) and reflect the extent of responsiveness.

Question 40

If elasticity is > 1

Answer 40

Changes in price lead to an even bigger change in quantity demanded; it is elastic

Question 41

If elasticity is between 0 - 1

Answer 41

the change in price is proportionally bigger than the result in change in quantity demanded; it is inelastic

Question 42

An elastic demand curve is

Answer 42

very flat; small changes in price lead to large changes in quantity demanded

Question 43

An inelastic demand curve will be

Answer 43

very steep; even a large change in price has a small effect on quantity demanded

Question 44

Factors that influence price elasticity

Answer 44

1. Substitution
2. Share of total budget
3. Search costs

Question 45

If a good is elastic

Answer 45

then demand is highly responsive to changes in price.

Question 46

Do not raise prices for a

Answer 46

an elastic good

Question 47

If a good is inelastic

Answer 47

then demand is going to be less responsive.

Question 48

Raise prices for

Answer 48

inelastic goods because the additional revenue per item offsets the small fall in quantity demanded.

Question 49

If income elasticity is greater than 1, the good is

Answer 49

superior

Question 50

if income elasticity is negative, these goods are

Answer 50

inferior

Question 51

Four behavior postulates

Answer 51

1. People have preferences
2. More of a good is preferred to less
3. People are willing to substitute one good for another
4. Marginal value falls as you consume more