Chapter 1 - Ten principles of economics

Question 1

What are the 4 factors in decision making?

Answer 1

1) People face trade-offs
2) Opportunity cost
3) Making decisions at the margin
4) People respond to incentives

Question 2

Define efficiency and equity.

Answer 2

Efficiency means that society is getting the maximum benefits from its scarce resources.
Equity means that the benefits of society’s resources are being distributed fairly among society’s members.

Question 3

What is an incentive?

Answer 3

It is something (such as the prospect of punishment or a reward) that induces a person to act.

Question 4

What is productivity?

Answer 4

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

Question 5

Define inflation

Answer 5

an increase in the overall level of prices in the economy

Question 6

What is a business cycle?

Answer 6

fluctuations in economic activity, such as employment and production

Question 7

Define scarcity

Answer 7

Scarcity is the limited nature of society’s resources.

Question 8

What is economics?

Answer 8

Economics is the study of how society manages its scarce resources

Question 9

What does “opportunity cost” mean?

Answer 9

The opportunity cost of an item is what must be given up to get that item.

Question 10

Define marginal changes

Answer 10

Marginal changes are small, incremental adjustments to a plan of action.

Rational people make decisions by comparing “marginal cost” and “marginal benefit “

Question 11

Define a market economy

Answer 11

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

Question 12

Define property rights

Answer 12

property rights are the ability of an individual to own and exercise control over scarce resources

Question 13

Define a market failure

Answer 13

Market failure occurs when a market left on its own fails to efficiently allocate resources.

Question 14

What are 2 causes of market failure?

Answer 14

1) Market power

2) Externality

Question 15

Define externality

Answer 15

“Externality” is the impact of one person’s actions on the wellbeing of a bystander.

Question 16

Define market power

Answer 16

Market power is the ability of a single economic actor/ small group of actors to have a substantial influence on market prices.

Question 17

What 3 factors affect how people interact?

Answer 17

1) Trade can make everyone better off
2) Markets are usually a good way to organize economic activity
3) Governments can sometimes improve market outcomes

Question 18

What 3 factors affect how the economy as whole works?

Answer 18

1) A country’s standard of living depends on its ability to produce goods and services
2) Prices rise when the government prints too much money
3) Society faces a short-run trade-off between inflation and unemployment.