The Principles

Question 1

1st Principle

Answer 1

Choices are necessary because resources are scarce

Question 2

Define:
-Resource
-Scarce

Answer 2

• anything that can be used to produce something else

-a resource is scarce when there’s not enough of the resource available to satisfy all the various ways a society wants to use it

Question 3

2nd Principle

Answer 3

The true cost of something is its opportunity cost

Question 4

Define Opportunity Cost

Answer 4

What you must give up (forego) in order to get something
- when making a decision you may not only consider the monetary cost

Question 5

3rd Principle
Trade-off?

Answer 5

How much is a decision at the margin

-comparison of the costs and the benefits of doing something

Question 6

Explain Marginal Decision
Define Marginal analysis

Answer 6

a decision made at the margins of an activity about whether to do a bit more or a bit less of that activity

the study of marginal decisions

Question 7

4th Principle

Answer 7

People respond to incentives (disincentives) exploiting opportunities to make themselves better off

Question 8

Define Incentive

Answer 8

anything that offers rewards to people who change their behaviour

Question 9

5th Principle

Answer 9

There are gains from trade, which arise from specialization

Question 10

Define Specialization

Answer 10

The situation in which each person specializes in the task that they are good at performing

Question 11

6th Principle

Answer 11

markets move toward equilibrium
-people respond to incentives and avoid harm (punishments), markets move toward equilibrium

Question 12

Define Equilibrium

Answer 12

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

Question 13

7th Principle

Answer 13

Resources should be used efficiently to achieve society’s goals

Question 14

How do you know if the economy is efficient

Answer 14

If it takes all opportunities to make some people/ organizations better off without making other people worse off
( use resources to produce optimally)

Question 15

Define Equity

Answer 15

a condition in which everyone gets their fair share of

Question 16

8th Principle

Answer 16

Markets usually lead to efficiency, but when they don’t government intervention can improve society’s welfare

people normally take opportunities to make themselves better off

Question 17

Define Efficiency

Answer 17

all the opportunities to make people better off have been exploited

Question 18

Explain Market Failure

Answer 18

the pursuit of self-interest makes society worse off
when markets don’t achieve efficiency, government can intervene to improve society’s welfare

Question 19

9th Principle

Answer 19

One persons spending is another person’s income
during recessions a drop in business
-less income
-less spending
-increase in unemployment

Question 20

10th Principle

Answer 20

Overall spending sometimes gets out of line with the economy’s productive capacity; when it does, government policy can change spending

Question 21

What is Productive capacity?

Answer 21

the amount of goods and services the economy is capable of producing

Question 22

What is Productive capacity?

Answer 22

the amount of goods and services the economy is capable of producing

Question 23

What is Overall Spending

Answer 23

amount of goods and services that consumers and businesses want to buy

Question 24

What happens if the overall spending doesn’t match the amount the economy is capable of producing?

Answer 24

when it falls short- economy experienced recession

when it outstrips the supply- the economy experience inflation

government policies can be used to address the imbalances (monetary policy, fiscal policy )

Question 25

11th Principle

Answer 25

Increases in the economy’s potential, lead to economic growth over time

Question 26

Define Economy’s Potential

Answer 26

the total amount of goods and services it can produce

Question 27

Define Economic growth

Answer 27

the increase in living standards over time

Question 28

Examples on how to boost economy’s potential

Answer 28

-emergence of new technologies
-skill development
-increase in resources available for production boost the economy’s potential
-> hence living standards improve

Question 29

What does an increase in living standards mean?

Answer 29

they are usually unequally distributed among a country’s residents- creating winners and losers
e.g.
new source of energy= benefit economy and government= winners
reduced demand for coal= reduce income for mining companies= losers

Question 30

Which principles are due to individual choices?

Answer 30

1-4

Question 31

Which Principles are due to interaction of individual choices?

Answer 31

5-8

Question 32

Which Principles are due to economy-wide interactions

Answer 32

9-11