Chapter 1: Ten Principles Of Economics

Question 1

Scarcity means that society has limited resource and therefore cannot produce all the goods and services people wish to have

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Question 2

Economics is the study of how society manages its scarce resources

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Question 3

Economists study how people make decisions: how much they work, what they buy, how much they save and how they invest their savings

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Question 4

Economists also study how people interact with one another

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Question 5

Economists analyze forces and trends that affect the economy as a whole, including the growth in average income, the fraction of the population that can’t find work, and the rate at which prices are rising

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Question 6

Principle 1: People face trade-offs

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Question 7

Decisions require trading off one goal against another

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Question 8

One classic trade-off is between “guns and butter”. The more Society spends on national Defense (guns) to protect is Shores from foreign aggressors, the less it can spend on consumer goods (butter) to raise the standard of living at home

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Question 9

The trade-off between a clean environment and a high level of income. Laws that require firms to reduce pollution raise the cost of producing goods and services. Because of these higher costs, the firms end up earning smaller profit, paying lower wages, charging higher pricing

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Question 10

Another trade off society faces is between efficiency and equality. Efficiency means that society is getting the maximum benefits from its scarce resources. Equality mean that those benefits are distributed uniformly among society’s members. In other words, efficiency refers to the size of the economic pie, and equality refers to how the pie is divided into individual slices

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Question 11

Principle 2: the cost of something is what you give up to get it

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Question 12

Opportunity cost of an item is what you give up to get that item

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Question 13

Principle 3: rational people think at the margin

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Question 14

Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities

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Question 15

Marginal change is used to describe a small incremental adjustment to an existing plan of action

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Question 16

Rational people often make decisions by comparing marginal benefits and marginal cost

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Question 17

Principle 4: people respond to incentives

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Question 18

An incentive is something (such as a prospect of a punishment or reward) that induces a person to act

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Question 19

Incentives are crucial to analyze how markets work

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Question 20

In the 1960s Ralph Nader’s book Unsafe at any speed generated much public concern over auto safety. Congress responded with laws requiring seatbelts as standard equipment on new cards

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Question 21

Principle 5: trade can make everyone better off

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Question 22

Trade allows each person to specialize in the activities she does best whether it is farming sewing or homebuilding

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Question 23

By trading with other, people can buy a greater variety of goods and services at a lower cost

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Question 24

The Chinese as well as the French and the Egyptians and the Brazilians are as much our partners in the world economy as they are our competitors

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Question 25

Principal 6: markets are usually a good way to organize economic activity

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Question 26

The theory behind central planning was that only the government could organize economic activity in a way that promoted economic will being for the country as a whole

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Question 27

In a market economy the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide who to hire and want to make. Households decides which firm to work for and what to buy with their income

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Question 28

Firms and households interact in the marketplace where prices and self interest guide their decisions

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Question 29

In his 1776 book An inquiry into the nature and causes of the wealth of Nations, economist Adam Smith made the most famous observation in all of economics: households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them desirable market outcomes

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Question 30

Prices are the instrument with which the invisible hand direct economic activity

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Question 31

The word economy comes from the Greek word oikonomos, which means the one who manages a household

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Question 32

Principal 7: governments can sometimes improve market outcome

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Question 33

Market economies need institutions to enforce property rights so individuals can own and control scarce resources

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Question 34

There are two broad reasons for a government to intervene in the economy and change the allocation of resources that people would choose their own: to promote efficiency or to promote equality

most policies aimed either to enlarge the economic pie or to change how the pie is divided

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Question 35

Economist use the term market failure to refer to a situation in which the market on its own fails to produce an efficient allocation of resources

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Question 36

One possible cause of market failure is an externality which is the impact of one person’s action on the well-being of a bystander

An example would be pollution. When the production of a good pollutes the air and creates health problems the market left to its own devices may fail to take this cost into account

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Question 37

Another possible cause of market failure is market power, which refers to the ability of a single person or firm to unduly influence market prices

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Question 38

A market economy rewards people according to their ability to produce things that other people are willing to pay for

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Question 39

Principle 8: a countries standard of living depends on its ability to produce goods and services

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Question 40

Almost all variation in living standards is attributable to differences in countries productivity that is the amount of goods and services produced by each unit of labor input

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Question 41

Principle 9: prices rise when the government prints too much money

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Question 42

Inflation is an increase in the overall level of prices in the economy

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Question 43

In almost all cases of large or persistent inflation the culprit is growth in the quantity of money

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Question 44

Principle 20: society faces a short run trade off between inflation and unemployment

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Question 45

Although a higher level of prices is, in the long run, the primary effect of increasing the quantity of money, the short run story is more complex and controversial.

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Question 46

Most economists describe the short run effects of monetary injections as follows:

increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services.

Higher demand may overtime cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services

more hiring means lower unemployment

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Question 47

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

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Question 48

By changing the amount that the government spends, the amount it taxes, and the amount of money it prints, policymakers can influence the overall demand for goods and services

Changes in demand in turn influence the combination of inflation and unemployment that the economy experiences in the short one.

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