Chapter 1 : Ten Principles of Economics

Question 1

Scarcity

Answer 1

Limited resources and unlimited wants

Question 2

Economics

Answer 2

Study of how society manages its scarce resources

Question 3

Efficiency

Answer 3

The property of society getting the most from its scarce resources

Question 4

Equality

Answer 4

The property of distributing economic prosperity uniformly among society’s members

Question 5

Rational

Answer 5

Systematically and purposefully doing the best you can to achieve your objectives

Question 6

Opportunity cost

Answer 6

Whatever is given up to get something else

Question 7

Marginal changes

Answer 7

Incremental adjustments to an existing plan

Question 8

Incentive

Answer 8

Something that induces a person to act

Question 9

Market economy

Answer 9

An economic system where interaction of households and firms in markets determines the allocation of resources

Question 10

Property rights

Answer 10

The ability of an individual to own and exercise control over scarce resources

Question 11

“Invisible hand”

Answer 11

The principle that self-interested market participants may unknowingly maximize the welfare of society as a whole

Question 12

Market failure

Answer 12

A situation in which the market fails to allocate resources efficiently

Question 13

Externality

Answer 13

When one person’s actions have an impact on a bystander

Question 14

Market power

Answer 14

The ability of an individual or group to substantially influence market prices

Question 15

Monopoly

Answer 15

The case in which there is only one seller in the market

Question 16

Productivity

Answer 16

The amount of goods and services produced from each unit of labor input

Question 17

Inflation

Answer 17

An increase in the overall level of prices

Question 18

Business cycle

Answer 18

Fluctuations in economic activity

Question 19

People face trade-offs = _____ ?

Answer 19

to get more of something we like, we have to give up something else that we like

Question 20

There is a social trade-off between ____ and ____

Answer 20

EFICIENCY (getting the most from our scarce resources) and EQUALITY (benefits being distributed
uniformly across society)

Question 21

Why when the government tries to cut the pie into more equal pieces, the pie gets smaller ?

Answer 21

Policies (EX: taxes and welfare) make incomes more equal => reduce returns to hard work => economy doesn’t produce as much

Question 22

What is the opp.cost when going to university ?

Answer 22

tuition payment + value of time
(NOT room and board payment BECAUSE we have
to eat and sleep whether you are in school or not)

Question 23

Rational decision makers only proceed with an action if ____

Answer 23

MB > MC

Question 24

Why do some policies have unintended consequences ?

Answer 24

Because Policies alter MC and MB => alter behavior in an unpredicted manner

Question 25

Why are markets usually a good way to organize economic activity

Answer 25

- G and S decided by self-interest firms and households are produced in the market (prices and quantities) - Prices generated by their competitive activity guide economic activity efficiently.

Question 26

There are 2 main sources of market failure a) ____ is when the actions of one person affect the well-being of a bystander (EX: pollution) b) ____ is when a single person or group can influence the price (EX: monopoly)

Answer 26

a) Externality | b) Market power

Question 27

Differences in incomes and standards of living are largely attributable to ____

Answer 27

differences in PRODUCTIVITY (the amount of goods and services produced from each unit of labor input)

Question 28

How to keep inflation low ?

Answer 28

maintain slow growth in the quantity of money (by policies)

Question 29

In the short-run, what cause a trade-off between inflation and unemployment ?

Answer 29

increase inflation => raises prices and production => more hiring => reduce unemployment

Question 30

Unemployment

Answer 30

Percent of the labor force that is out of work

Question 31

Standard of living

Answer 31

Material well-being