Lecture 1

Question 1

What is market power?

Answer 1

the ability of a single person (or small group) to unduly influence market price (e.g. monopoly)

Question 2

What are externalities?

Answer 2

the impact of one person’s actions on the well-being of a bystander (e.g. pollution) (a cause of market inefficiency)

Question 3

What is an incentive?

Answer 3

something that induces a person to act (Ex. the prospect of a reward or punishment)

Question 4

What is micro economics?

Answer 4

a branch of economics that studies how individuals and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold

Question 5

What is (market) efficiency?

Answer 5

getting the most out of our scarce resources.

Question 6

What is equity?

Answer 6

distributing prosperity fairly among society’s members.

Question 7

What is opportunity cost?

Answer 7

whatever must be given up to obtain a thing

Question 8

What is a sunk cost?

Answer 8

Opportunity cost that has already occurred or must occur for an opportunity (is irrelevant to Cost V. Benefit)

Question 9

What is a market economy?

Answer 9

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

Question 10

What are property rights?

Answer 10

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

Question 11

What is scarcity?

Answer 11

refers to the limited nature of society’s resources. We need economics to manage the problem of managing our scarce resources

Question 12

What does Mankiw’s 1st principle say about people facing tradeoffs?

Answer 12

It says all decisions require trade offs. (no such thing as a free lunch)

Society faces an important tradeoff: Efficiency vs. Equity

Question 13

What does Mankiw’s 2nd principle say about cost and benefit?

Answer 13

Making decisions requires comparing the costs and benefits of alternative choices (Best choice, next best etc.)

Rational decision makers are motivated by a Cost V. Benefit analysis model

Question 14

What does Mankiw’s 3rd principle say about rational people?

Answer 14

Rational people think at the margins.

A rational decision maker utilizes the Cost V. benefit analysis model

rational people take an action if and only if the marginal benefit of the action exceeds the marginal cost

Question 15

What does Mankiw’s 4th principle say about incentives?

Answer 15

People Respond to Incentives

Rational people respond to incentives because they make decisions by comparing costs and benefits

Question 16

What does Mankiw’s 5th principle say about trade?

Answer 16

Trade Can Make Everyone Better Off

Rather than being self-sufficient, people, firms, countries, etc. can specialize in producing one good or service and exchange it for other goods

Question 17

What does Mankiw’s 6th principle say about Markets?

Answer 17

Markets (market economy) Are Usually a Good Way to Organize Economic Activity

“Organize economic activity” means determining:
-what goods to produce
-how to produce them
-how much of each to produce
-who gets them (very contentious point)

Question 18

What does Mankiw’s 7th principle say about Governments impact on markets?

Answer 18

Governments Can Sometimes Improve Market Outcomes (efficiency) by:

Enforcing property rights, people want assurance their hard earned goods will be safe

Promoting market efficiency through public policy and minimizing market inefficiencies (externalities, market power)

NOTE: Government may alter market outcome to promote equity (welfare policy)

Question 19

What are normative economics?

Answer 19

Are based on opinions. Aims to improve the world around us based on what we “should” or “could” do.

Think of economic policy advisors who tell us what we “should” do to improve our economy.

Question 20

What are positive economics?

Answer 20

Are based on fact or theory and are supported by logical arguments.

Think of economic scientists who study the world around us and aim to tell us what is happening and why it is happening.