Section 1 - Ch. 1-3

Question 0

Core Principles

Answer 0

1 Scarcity (“No-Free-Lunch”) 
2. Cost-Benefit 
3. Incentive 
4. Comparative Advantage 
5. Increasing Opportunity Cost (“ Low-
Hanging-Fruit”) 
6. Efficiency 
7. Equilibrium (“No Cash on the Table”)

Question 1

economics

Answer 1

the study of how people make choices under conditions of scarcity and of the results of those choices for society

Question 2

Scarcity Principle

Answer 2

“No-Free-Lunch”

Although 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.

Question 3

Cost-Benefit Principle

Answer 3

An individual (or a firm or a society) should take an action if,and only if,the extra benefits from taking the action are at least as great as the extra costs.

Question 4

Incentive Principle

Answer 4

economic naturalism, if you want to predict people’s behavior, a good place to start is by examining their incentives
Action is more likely to be taken if the benefit rises and less likely to be taken if the cost rises. This principle examines people’s incentives to predict their behavior.

Question 5

Comparative Advantage

Answer 5

when two people (or two nations) have different opportunity costs of performing various tasks, they can always increase the total value of available goods and services by trading with one another

Everyone does best when each concentrates on the activities for which their opportunity cost is lowest. (The total value of output increases with specialization and trade.)

Question 6

Increasing Opportunity Cost

Answer 6

“Low-Hanging-Fruit”

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

Question 7

Efficiency Principle

Answer 7

when the economics pie grows larger, everyone can have a larger slice than before

Question 8

Equilibrium Principle

Answer 8

“No Cash on the Table”

a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action

Question 9

rational person

Answer 9

people who systematically a purposefully do the best they can to achieve their objectives, given the available opportunities

Question 10

economic surplus

Answer 10

the economic surplus from taking any action is the benefit of taking that action minus its cost

Question 11

opportunity cost

Answer 11

the value of what must be forgone in order to undertake the activity

Question 12

marginal cost

Answer 12

the increase in total cost that results fromcarrying out one additional unitof an activity

Question 13

marginal benefit

Answer 13

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

Question 14

time going to school

Answer 14

the largest opportunity cost

Question 15

equality

Answer 15

the property of distributing economic prosperity uniformly among the members of society

Question 16

efficiency

Answer 16

the property of society getting the most it can from its scarce resources

Question 17

the size of the economic pie

Answer 17

efficiency

Question 18

how the economic pie is divided into individual slices

Answer 18

equality

Question 19

Greater equality =

Answer 19

reduced efficiency

Question 20

marginal change

Answer 20

a small incremental adjustment to an existing plan of action

Question 21

incentive

Answer 21

something that induces a person to act

Question 22

higher price in a market

Answer 22

incentive for buyers to consume less and sellers to produce more

Question 23

how a market economy allocates scarce resources

Answer 23

the influence of prices on the behavior of consumers and producers

Question 24

market economy

Answer 24

the decisions of a central planner are replaced by the decisions of millions of firms and households, an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Question 25

Adam Smith’s observation

Answer 25

Households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes

Question 26

prices

Answer 26

the instrument with which the invisible hand directs economic activity

Question 27

reason gov’t is needed

Answer 27

the invisible hand can work its magic only if the gov’t enforces the rules and maintains the institutions that are key to a market economy

Question 28

property rights

Answer 28

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

Question 29

business cycle

Answer 29

fluctuations in economic activity, such as employment and production

Question 30

externality

Answer 30

the uncompensated impact of one person’s actions on the well-being of a bystander

Question 31

inflation

Answer 31

an increase in the overall level of prices in the economy

Question 32

market failure

Answer 32

a situation in which a market left on its own fails to allocate resources efficiently

Question 33

market power

Answer 33

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Question 34

productivity

Answer 34

the quantity of goods and services produced from each unit of labor input

Question 35

circular-flow diagram

Answer 35

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