Froeb Ch 2

Question 1

goal

Answer 1

exploit inefficiency as an opportunity to make money

Question 2

how is wealth created

Answer 2

when assets move from lower to higher valued uses

Question 3

value

Answer 3

measured as the amount of money someone is willing to pay for a service or good

Question 4

buyer’s value

Answer 4

how much they are willing to pay for it, their top dollar

Question 5

seller’s value

Answer 5

cost or bottom line. how much they are willing to sell it for

Question 6

advantage of capitalism

Answer 6

creates wealth by letting people follow their self-interest

for ex: a buyer willingly buys if the price is below their top dollar and seller for the same selfish reason

Question 7

both buyers and sellers gain otherwise….

Answer 7

they cannot transact

Question 8

voluntary transactions create

Answer 8

WEALTH by moving assets from lower to higher valued uses

Question 9

seller surplus

Answer 9

difference between agreed price and seller’s value

Question 10

buyers surplus

Answer 10

difference between agreed price and buyer’s top dollar

Question 11

total surplus

Answer 11

sum of buyer’s and seller’s surplus

Question 12

zero sum fallacy

Answer 12

thinking because one person earns money another one loses. A fallacy because the voluntary nature of a trade requires both parties gains, otherwise a transaction wouldn’t occur

Question 13

does government create wealth?

Answer 13

the government plays a critical role in the wealth creating process by enforcing property rights and contracts to facilitate voluntary transactions

Question 14

poverty

Answer 14

absence of property rights

Question 15

wealth creating transactions are less likely to occur without

Answer 15

private property and contract enforcement

Question 16

underground

Answer 16

how poor countries survive

Question 17

give people ownership to their property and create…

Answer 17

an incentive for them to take care of it, invest in it, and keep it clean.

Question 18

economics is used for

Answer 18

spot money making opportunities

Question 19

efficiency

Answer 19

an economy is efficient if all assets are employed in their highest valued uses.

Question 20

good policy facilitates

Answer 20

the movement of assets to higher-valued uses

Question 21

bad policy prevents

Answer 21

assets from moving or, worse, moves assets to lower-valued uses.

Question 22

to determine good or bad policy you must analyze

Answer 22

all effects - intended and unintended

Question 23

Henry Hazlitt - the one lesson in economics (art of economics)

Answer 23

consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists of tracing the consequences of that policy not merely for one group but for all groups.
-look at incentives

Question 24

the one lesson of business (art of business)

Answer 24

consists of identifying assets in low-valued uses and devising ways to provably move them to higher valued ones

Question 25

anything that impedes assets movement destroys potential wealth

Answer 25

taxes, subsidies, and price controls. these create inefficiency which also means opportunity

Question 26

taxes

Answer 26

government collects taxes out of the total surplus created by a transaction. IF TAX IS LARGER THAN THE SURPLUS, THE TRANSACTION WILL NOT TAKE PLACE

Question 27

issues with taxes

Answer 27

The one lesson of economics tells us that the intended effect of a tax is to raise revenue for the government, but the unintended consequence of a tax is that it deters some wealth-creating transactions.

Question 28

issues with taxes

Answer 28

The one lesson of business tells us that these unconsummated transactions represent money-making opportunities.

Question 29

subsidies

Answer 29

the opposite of a tax. By encouraging low-value consumers to buy or high-value sellers to sell, subsidies destroy wealth by moving assets from higher- to lower-valued uses—in exactly the wrong direction.

Question 30

price control

Answer 30

a regulation that allows trade only at certain prices

Question 31

two types of price control

Answer 31

price ceilings and price floorsq

Question 32

price ceilings

Answer 32

outlaw trade at prices above the ceiling

Question 33

price floors

Answer 33

outlaw trade prices below the floor

Question 34

how to deter wealth-creating transactions

Answer 34

Price floors above the buyer’s top dollar or price ceilings below a seller’s bottom line

Question 35

inefficiency implies

Answer 35

a money making opportunity

Question 36

a company is

Answer 36

a series of transactions

Question 37

a well designed organization rewards…

Answer 37

employees who identify and consummate profitable transactions or who stop unprofitable ones