Part 1

Question 1

The Scarcity principle

Answer 1

we have boundless needs and wants the resources available to us are limited. So having more of one good thing usually means having less of another. Leading to trade-offs

Question 2

The cost-benefit principle

Answer 2

an individual should take an action if, and only if, the extra benefits from taking the action or at least as great as the extra costs.

Question 3

Economic surplus

Answer 3

the benefit of taking an action minus its cost.

Question 4

Opportunity cost

Answer 4

the value of what must be forgone to undertake an activity.

Question 5

Three important pitfalls

Answer 5

1 measuring costs and benefits as proportions rather than absolute dollar amounts
2 minoring implicit costs
3 failure to think at the margin

Question 6

Sunk cost

Answer 6

cost that is beyond recovery at the moment a decision must be made

Question 7

Marginal cost

Answer 7

is the increase in total cost that results from carrying out one additional unit of an activity.

Question 8

Marginal benefit

Answer 8

the increase in total benefit that results from carrying out one additional unit of an activity.

Question 9

Average cost

Answer 9

is the total cost of undertaking n units of an activity divided by n

Question 10

Average benefits

Answer 10

is the total benefit of undertaking n units of an activity divided by n

Question 11

Microeconomics

Answer 11

is the study of individual choice under scarcity and it’s implications for the behavior of of prices and quantities in individual markets.

Question 12

Absolute advantage

Answer 12

one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person.

Question 13

Comparative advantage

Answer 13

one person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other persons opportunity cost.

Question 14

The principle of comparative advantage

Answer 14

everyone does best when each person for each country concentrates on the activities for which is or her opportunity cost is lowest.

Question 15

The principle of increasing opportunity cost (also called the low-hanging-fruit principle)

Answer 15

In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterwards turn to resources with higher opportunity costs.

You should pick the low hanging fruit because it’s faster and easier hence cheaper to pick. It boils down to taking advantage of your most favorable opportunities first.

Question 16

Substitution effect

Answer 16

The change in the quantity demanded of a good that results because buyers switch two or from substitutes when the price of the good changes.

Question 17

Buyers reservation price

The sellers reservation price

Answer 17

The largest dollar amount the buyer would be willing to pay for a good

The smallest dollar amount for which a seller would be willing to sell an additional units, generally equal to marginal cost

Question 18

Buyers surplus

Sellers surplus

Total surplus

Answer 18

Buyers surplus the difference between the buyers reservation price and the price he or she actually pays

Sellers surplus the difference between the price received by the seller and his or her reservation price

Total surplus the difference between the buyers reservation price and the seller’s reservation price

Question 19

The efficiency principle

Answer 19

efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.

Question 20

The equilibrium principle (also called the no cash on the table principle)

Answer 20

a market in equilibrium leaves no unexploited opportunities for individuals that may not exploit all games achievable through collective action.