Chapter 1 (Intro)

Question 1

What is Economics all about?

Answer 1

Economics is a way of thinking, and gives insight onto why 1) businesses make the choices they make and 2) you make the choices you make in your everyday life

Question 2

What are the four core principles in economics?

Answer 2

1.The cost-benefit principle
2.The Opportunity Cost Principle
3. The Marginal Principle
4. The Interdependence Principle

Question 3

What is the cost-benefit principle?

Answer 3

A concept that suggests action should only be taken if the benefits derived from something is greater than the costs. (positive trade-offs)

Question 4

What is a trade-off?

Answer 4

Exchange something of value, especially as part of a compromise

Question 5

how do you utilize the “willingness to pay” method?

Answer 5

By converting nonfinancial costs or benefits into their monetary equivalents

Question 6

What does “Economic surplus” mean in terms of the cost-benefit principle?

Answer 6

The total benefits minus the total costs flowing from a decision.

Ex. Buying a granola bar for $2 when it is worth $3 to you: hence, your economic surplus is $1

Question 7

Who can generate economic surplus?

Answer 7

Both the seller and the supplier

Question 8

What is the Framing Effect?

Answer 8

When a decision is affected by how a choice is described or framed

ex. “The item cost more in the past so i should buy it now”

ex. a restaurant has one outrageously priced item to make the other meals appear cheap in comparison

Question 9

What does Opportunity Cost mean?

Answer 9

The true cost of something is the next best alternative you have to give up to get it

Question 10

If you have a list of things to do in order of importance:

1. Work on homework
2. Hang out with friends
3. Watch one piece
4. Take a nap

If you decide to do #1, what is your opportunity cost?

Answer 10

2 which is hanging out with friends

Question 11

What does Scarcity mean?

Answer 11

Resources are limited and therefore any resources you spend pursuing one activity leaves fewer resources to pursue others

Question 12

What does the phrase “no free lunch” mean?

Answer 12

There is an opportunity cost of time it takes to get a “free” lunch

Question 13

What is a Sunk Cost?

Answer 13

A cost that has been incurred and cannot be reversed. A sunk cost exists in whatever choice you make, and hence it is NOT an opportunity cost

Question 14

T/F Good decision makers ignore Sunk Costs

Answer 14

True

Question 15

Is there a trade-off to Sunk Costs?

Answer 15

No, because the choice has already been madee

Question 16

What does Production Possibilities Frontier (PPF) show?

Answer 16

• It shows the different sets of output that are attainable with you scarce resources
• Illustrates the possible trade-offs you confront when deciding how to allocate you scarce resources (like your time)

Question 17

What does moving along the PPF line or curve reveal?

Answer 17

You opportunity costs

Question 18

What does it mean if you are either below or beyond you PPF curve?

Answer 18

• If you’re below your PPF, you are using your resources inefficiently
• If you’re beyond your PPF, you can’t be because it is unattainable unless you increase your productivity in some way

Question 19

What does Marginal Principle mean?

Answer 19

-Decisions about quantities are best made incrementally

• You should break “how many” questions into a series of smaller, or marginal, decision by weighing the marginal benefits and marginal costs

Question 20

What does Marginal Benefit mean?

Answer 20

The extra benefit from one extra unit (of goods purchased, hours studied etc)

Question 21

What does Marginal Cost mean?

Answer 21

The extra cost from one extra unit

Question 22

What does the Rational Rule state?

Answer 22

If something is worth doing, keep doing it iteratively until your marginal benefits equal your marginal costs

Question 23

When is Economic Surplus maximized?

Answer 23

When the marginal benefit equals the marginal cost

Question 24

What is a business?

Answer 24

An organization that produces or sells goods and/or services to make a profit

Question 25

Profit Equation?

Answer 25

Revenue - Costs

Question 26

When do you stop marginal benefit?

Answer 26

When the marginal benefit equals the marginal cost

Question 27

What does the Interdependence Principle state and what are the four things it depends on/

Answer 27

Your best choice, which depends on 1) your other choices 2) the choices others make 3) developments in other markets 4) expectations about the future

Question 28

Will changes in prices and opportunities in one market affect the choices you might make in other markets?

Answer 28

Absolutely

Question 29

What are the flaws of a casual relationship?

Answer 29

Correlations can exist in the world that do not make sense ie) coincidence