lecture 1 review chapter 1-3

Question 1

scarcity

Answer 1

Inability to satisfy our wants

Question 2

Economics

Answer 2

the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

the study of how societies manage their scarce

Question 3

macro

Answer 3

economy wide phenomena, including inflation, unemployment, and economic growth.

Question 4

micro

Answer 4

the study of how households and firms make decisions and how they interact in markets.

Question 5

efficiency

Answer 5

the property of society getting the maximum benefits from it scarce resources

Question 6

Opportunity cost

Answer 6

highest valued alternative that must be given up to obtain some item.

Question 7

Two components of opportunity cost

Answer 7

• Monetary

- Non-monetary (the things you can’t do with your time if you go to the concert.

Question 8

Marginal cost vs marginal benefit

Answer 8

• The benefit from pursuing an incremental increase in an activity is its marginal benefit.
• The opportunity cost of pursuing an incremental increase in an activity is its marginal cost

Question 9

If the marginal benefit from an incremental increase in an activity exceeds its marginal cost

Answer 9

your rational choice is to do more of that activity.

Question 10

A change in marginal cost or marginal benefit changes

Answer 10

the incentives that we face and leads us to change our choice.

Question 11

We need governments for 2 reasons.

Answer 11

• Enforces the rules and maintains the institutions that are key to a market economy.
  o Property rights: the ability of an individual to own and exercise control over scarce resources.
• To promote efficiency and equity.

Question 12

o The goal of efficiency

Answer 12

♣ market failure: a situation in which a market left on its own fails to allocate resources efficiently
♣ externality: the impact of one person’s actions on the well-being of a bystander.

Question 13

o Goal of equity.

Answer 13

♣ Even when the invisible hand is yielding efficient outcomes, it can nonetheless leave sizable disparities in economic well-being.

Question 14

Productivity:

Answer 14

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

GDP per capita and GDP per hour are closely linked.

Question 15

Inflation

Answer 15

an increase in the overall level of prices in the economy.

Question 16

causes of inflation

Answer 16

o Demand
o Supply
o Printing money

Question 17

Business cycle

Answer 17

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

Question 18

Desired:

Answer 18

low inflation and low unemployment

Question 19

Expansion

Answer 19

high inflation, low unemployment

Question 20

Recession

Answer 20

low inflation, high unemployment.

Question 21

Circular flow diagram

Answer 21

a visual model of the economy that shows how dollars’ flow through markets among households and firms.

Question 22

Production possibilities frontier

Answer 22

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

Question 23

Positive statements:

Answer 23

claims that attempt to describe the world as it is.

Question 24

Normative statements:

Answer 24

claims that attempt to prescribe how the world should be.

Question 25

Opportunity cost

Answer 25

measures the cost of not being able to produce something else with the resources used.

Question 26

Comparative advantage

Answer 26

a country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower than in other countries

Question 27

Absolute advantage

Answer 27

the comparison among producers of a good according to their productivity.

Question 28

no such thing as a free lunch

Answer 28

• To get something we like, we have to give up something else that we also like. (trading off one goal for another.

Question 29

guns and butter

Answer 29

• the more a country spends on national defence, the less it can spend on consumer goods (butter) to raise the standard of living at home.

Question 30

trade off between efficiency and equality

Answer 30

• often conflict. Essentially how can we get the most out of resources and how can we make sure they are distributed equally. Policies like welfare or income tax reduce efficiency.

Question 31

if an outcome is efficient

Answer 31

points on the curve (rather than inside) represent efficient levels of production.

Question 32

principles of how people make decisions

Answer 32

• People face trade-offs
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives
• People face trade-offs
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives

Question 33

people face trade offs

Answer 33

“no such thing as a free lunch”

Government

Efficiency: The property of society getting the maximum benefits from its scarce resources.

Equity: The property of distributing economic prosperity fairly among the members of society.

Question 34

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

Answer 34

Opportunity cost: highest-valued alternative that must be given up to obtain some item.

Example: What is your opportunity cost of going to university?
What is your opportunity cost of going to a concert?

Opportunity cost has two components:

1. The price of the ticket (Monetary)
2. The things you can’t do with your time if you go to the concert (non-monetary).

Question 35

RATIONAL PEOPLE THINK AT THE MARGIN

Answer 35

Rational people: People who systematically and purposefully do the best they can to achieve their objectives.

Marginal changes: Small incremental adjustments to a plan of action.

marginal cost vs. marginal benefit

To make a choice at the margin, you evaluate the consequences of making incremental changes in the use of your time.

The benefit from pursuing an incremental increase in an activity is its marginal benefit.

The opportunity cost of pursuing an incremental increase in an activity is its marginal cost.

If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, your rational choice is to do more of that activity.

Question 36

people respond to incentives

Answer 36

incentive: Something that induces a person to act.

A change in marginal cost or a change in marginal benefit changes the incentives that we face and leads us to change our choice.

Example: higher tax to reduce the consumption of something.

Question 37

trade can make everyone better off

Answer 37

Trade can make everyone better off

• Trade allows each person to specialize at what he or she does best
• Example: different jobs, countries specialize in different products

Question 38

markets are usually a good way to organize economic activity

Answer 38

Markets are usually a good way to organize economic activity

• Market economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
• Invisible hand: Adam smith observed that households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes

Question 39

governments can sometimes improve market outcomes

Answer 39

1. Enforces the rules and maintains the institutions that are key to a market economy
   - Property rights: the ability of an individual to own and exercise control over scarce resources
2. To promote efficiency and equity:
   - The goal of efficiency
   o Market failure: a situation in which a market left on its own fails to allocate resources efficiently
   o Externality: the impact of one person’s action on the well-being of a bystander
   - The goal of equity
   o Even when the invisible hand is yielding efficient outcomes, it can nonetheless leave sizable disparities in economic well-being.

Question 40

A countries standard of living depends on its ability to produce goods and services.

Answer 40

• Productivity: the quantity of goods and services produced from each hour of a worker’s time.
• GDP per capita and GDP per hour are closely linked.

Question 41

prices rise when the government prints to much money

Answer 41

Inflation: and increase in the overall level of prices in the economy

What causes inflation?

• Demand
• Supply
• Printing money

Question 42

society faces a short run trade off between inflation and enemployment

Answer 42

This short run trade-off plays a key role in the analysis of the business cycle.

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

Desired
Expansion
Recession