Chapter 1 - Principles of Economics

Question 1

What is Economics?

Answer 1

The study of how society manages its scarce resources.

Question 2

Why is the management of society’s resources importance?

Answer 2

Because resources are scarce and requires societies attention.

Question 3

What is Principle #1 in Economics?

Answer 3

People Face Tradeoffs.

There is never anything that is free, you must give in order to receive.

“There ain’t no such thing as a free lunch.”

Question 4

What is the meaning of Efficiency and Equity?

Answer 4

Efficiency - the property of society getting the most it can from its scarce resources.

Equity - The property of distributing economic prosperity fairly among the members of society.

Question 5

What is Principle #2 in Economics?

Answer 5

The cost of something is What you give up to get it.

Question 6

What is the meaning of Opportunity Cost?

Answer 6

Whatever must be given up to obtain some item.

Question 7

What is principle #3 in Economics?

Answer 7

Rational People think at the margin.

This means systematically and purposefully do the best they can to achieve their objectives, given the available opportunities.
- Definition for Rational People.

Question 8

What is the definition of Marginal Changes?

Answer 8

Small incremental adjustments to a plan of action.

If an issue occurs, sometimes it requires “a change of plans”.

Question 9

What is Principle #4 in Economics?

Answer 9

People respond to Incentives.

For example, there is a huge blowout sale going on; many people will respond to this buy going to this sale.

Question 10

What does Incentive even mean?

Answer 10

Something that induces a person to act.

Question 11

What is Principle #5 in Economics?

Answer 11

Trade can make everyone better off.

Trading allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. Therefore, trade between two countries could/can make each country better off.

Question 12

What is Principle #6 in Economics?

Answer 12

Markets are usually a good way to organize Economic Activity.

*in his 1776 book, Adam Smith observed that households and firms interacting in markets act as if they are guided by an INVISIBLE HAND that leads them to desirable market outcomes.

Question 13

What is Market Economy?

Answer 13

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

Question 14

What is Principle #7 in Economics?

Answer 14

Governments can sometimes improve market outcomes.

We need the government for two reasons:
1. To enforce property rights
Property rights - the ability of an individual to own and exercise control over scarce resources.
2. To intervene in the economy
- promote efficiency : in order to avoid market failure.
- promote equity

*Even when outcomes are efficient in the market, there can still be disparities in economic well-being.

Question 15

What is Market Failure, externality, and market power?

Answer 15

Market Failure - a situation in which a market left on its own fails to allocate resources efficiently.
Externality - The impact of one person’s actions on the well-being of a bystander.
Market Power - The ability of a single economic actor (or a small group of actors) to have a substantial influence on market prices. (Note: Actors referring to people who are involved.)

Question 16

What is Principle #8 in Economics?

Answer 16

A country’s standard of living depends on its ability to produce goods and services.

Typically, how good it is to live in a certain country depends on how well it can manage its production in the market.

For example China, recently China has been able to have the highest economic prosperity due its high ability to produce and trade with other countries.

Question 17

What is the definition of Productivity?

Answer 17

The quantity of goods and services produced from each hour of a worker’s time.

*how much are workers able to produce on a set time.

Question 18

What is Principle #9 in economics?

Answer 18

Prices rise when the government prints too much money.

When there is too much money printed, this causes inflation in society.

Question 19

What is Inflation?

Answer 19

An increase in the overall level of prices in economy.

When the general price level rises, each unit of currency buys fewer goods and services.

Inflation corresponds to a reduction in the purchasing power of money.

Question 20

What is the last 10th principle in Economics?

Answer 20

Society faces a short-run tradeoff between inflation and Unemployment.

This short-run tradeoff plays a key role in the analysis of the business cycle.

Question 21

What is the Business Cycle?

Answer 21

The irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed.