Microeconomics Principles

Question 1

Principal 1: Choice

Answer 1

Choices are necessary because resources are scarce

Question 2

Resource

Answer 2

Anything that can be used to make something else

Question 3

Scarce

Answer 3

In short supply, not enough to satisfy all the ways society wants to use it in

Question 4

Principle 2: Opportunity Cost

Answer 4

The true cost of something is its opportunity cost

Question 5

Opportunity Cost

Answer 5

What you must give up in order to get something

Ex: If you go skiing one day, you would be giving up the $40 per day that your job pays.

Question 6

Principle 3: Trade off

Answer 6

“How much” is a trade off decision at the margin

Question 7

Trade off

Answer 7

Comparison of the costs and benefits of doing something

Question 8

Marginal decision

Answer 8

Decision made at the margin of an activity about whether to do a bit more or less

Ex: Should I take another bite of the candy bar?

Question 9

Marginal analysis

Answer 9

Study of a marginal decision

Ex: What would happen if I took another bite?

Question 10

Incentive

Answer 10

Anything that offers rewards to people who change their behavior

Question 11

Relationship between costs and benefits

Answer 11

Reciprocal

Not incurring a cost = getting a benefit

Not getting a benefit = incurring a cost

Question 12

Economic Surplus

Answer 12

Benefit of taking any action minus its cost

Question 13

Goal of economic decision makers

Answer 13

Maximize economic surplus

Question 14

Principle 4: Incentives

Answer 14

People usually respond to incentives, exploiting opportunities to make themselves better off

Ex: Waiters and tips, would be more attentive expecting a reward

Question 15

Problem with incentive system

Answer 15

Can lead to crime or injustice

Ex: judge takes bribe to send more young people to jail, teens jailed for unreasonable crimes like voicing their opinion

Question 16

Principle 5: Trade

Answer 16

There are gains from trade. Trade allows us all to consume more than we otherwise could.

Question 17

Gains from trade globally

Answer 17

Each country has a different opportunity cost, thus, they specialize and trade

Ex: China has a lower opportunity cost producing phones while the U.S has a lower one producing at trucks. They specialize in what costs them the least and use it for trade.

Question 18

Specialization

Answer 18

Situation in which each person/country specializes in the task that they are good at performing

Question 19

What causes economic growth?

Answer 19

1. Increase in factors of production
2. Better technology

Question 20

Factors of Production

Answer 20

1. Land: natural resources (mineral deposits, oil, natural gas, water, literal land)
2. Labor: mental and physical abilities of workforce
3. Physical capital: manufactured items used to produce other goods and services (shovel, crane, crop duster)
4. Human capital: educational achievements and skills of the labor force (increases factor 2)

Question 21

Principle 6: Equilibrium

Answer 21

Markets move towards equilibrium

Question 22

Equilibrium

Answer 22

Economic situation in which no individual would be better off doing something different

Question 23

Principle 7: Resources

Answer 23

Resources should be used efficiently to achieve society’s goals

Question 24

Efficiency

Answer 24

Taking all opportunities to make some people better off without making others worse off

Question 25

Equity

Answer 25

Condition in which everyone gets their “fair share”

Often trumps efficiency

Ex: disabled parking lots provide equity but disrupt efficiency

Question 26

Principle 8: Markets

Answer 26

Markets usually lead to efficiency.

People normally take opportunities for mutual gains

Question 27

Principle 9: Government Intervention

Answer 27

When markets do not achieve efficiency, government intervention can improve society’s welfare

When markets fail they need correction

Question 28

Principle 10: Spending & Income

Answer 28

One person’s spending is another’s income

Question 29

Economic recessions

Answer 29

When a drop in spending leads to a drop in income and a continous cycle