Chapter 1: First Principles

Question 1

KEY TERM:
Individual Choice

Answer 1

the decision by an individual of what to do, which necessarily involves a decision of what not to do.

Question 2

KEY TERM:
Resource

Answer 2

something that can be used to produce something else; includes natural resources (from the physical environment) and human resources (labor, skill, intelligence).

Question 3

KEY TERM:
Scarce

Answer 3

in short supply; a resource is scarce when there is not enough of the resource available to satisfy all the needs and wants of a society.

Question 4

KEY TERM:
Opportunity Cost

Answer 4

the real cost of an item: what you must give up in order to get it.
What is given up ÷ what is gained.

Question 5

KEY TERM:
Trade-off

Answer 5

a comparison of costs and benefits of doing something.

Question 6

KEY TERM:
Marginal Decisions

Answer 6

a decision made at the “margin” of an activity to do a bit more or a bit less of that activity.

Question 7

KEY TERM:
Marginal Analysis

Answer 7

the study of marginal decisions.

Question 8

KEY TERM:
Incentive

Answer 8

anything that offers rewards to people to change their behaviour.

Question 9

KEY TERM:
Trade

Answer 9

the practice, in a market economy, in which individuals provide goods and services to others and receive goods and services in return.

Question 10

KEY TERM:
Gains from Trade

Answer 10

mutual gains achieved by specialisation (dividing tasks) and trading; in this way people can get more of what they want through trade than they could if they tried to be self-sufficient.

Question 11

KEY TERM:
Specialization

Answer 11

the situation in which each person specialises in the task that they are good at performing.

Question 12

KEY TERM:
Equilibrium

Answer 12

an economic situation in which no individual would be better off doing something different.

Question 13

KEY TERM:
Economic efficiency

Answer 13

description of a market or economy that takes all opportunities to make some people better off without making other people worse off. Productive and allocative efficiency is maximised. Also called Pareto efficiency.

Question 14

KEY TERM:
Equity

Answer 14

fairness; everyone gets their fair share.

Question 15

KEY TERM:
Potential

Answer 15

the total amount of goods and services that can be produced.

Question 16

4 principles that guide individual choice?

Answer 16

1) Choices are necessary because resources are scarce. Society in the market economy makes choices as an amalgamation of individual choices.
2) The true cost of something is its opportunity cost. Monetary costs are only an indication.
3) Marginal decisions require making trade-offs.
4) People respond to incentives, exploiting opportunities to make themselves better off.

Question 17

4 principles that guide how individuals interact (microeconomics)?

Answer 17

1) Gains from trade.
2) Markets move towards equilibrium (predictable).
3) Resources should be used as efficiently as possible to attain society’s goals, otherwise they need rearranging. Policy makers don’t always strive for efficiency as they have to look at trade-offs of economic efficiency and equity (social justice, individual liberty).
4) Government intervene during market failure to improve societal welfare.

Question 18

3 principles that guide economy-wide interactions (macroeconomics)?

Answer 18

1) One person’s spending is another person’s income.
2) Overall spending sometimes gets out of line with the economy’s productive capacity. Recession = spending < supply. Inflation = spending > supply.
3) Increases in the economy’s potential leads to economic growth (emergence of new technologies and resources for production). Production rises = higher living standards AND winners and losers of growth. In a dynamic competitive market, losers don’t always stay losers (principle #4 and #9).

Question 19

What is an economy’s resource?

Answer 19

Land, labour, capital, human capital (entrepreneurship).