Chapter 1: Five Foundations of Economics

Conclusion

1) Economists ask, and answer, big questions about life. This is what makes the study of economics so fascinating. 2) Economics is the study of how people allocate their limited resources to satisfy nearly unlimited wants. 3) The five foundations of economics: -Incentives -Trade-offs -Opportunity cost -Marginal thinking -Trade creates value

What is economics?

Economics is the study of how people allocate their limited resources to satisfy their nearly unlimited wants. Because of the limited nature of society's resources, even the most abundant resources are not always plentiful enough everywhere to meet the wants and needs of every person. So how do individuals and societies make decisions about how to use the scarce resources at their disposal? This is the basic question economists seek to answer.

A) trade-offs.

The governor decides to increase funding for education. However, this will mean decreasing funding for infrastructure. This situation illustrates A) trade-offs. B) comparative advantage. C) incentives. D) markets.

B) the value of the next-best alternative you could have purchased.

The opportunity cost of buying a good is A) the sum of values of all the other goods you could have purchased. B) the value of the next-best alternative you could have purchased. C) irrelevant since you will purchase your highest-valued good. D) the average of values of all the other goods you could have purchased.

A) Scarcity forces us to make choices.

What can be said about scarcity? A) Scarcity forces us to make choices. B) Scarcity doesn't affect the super-wealthy. C) Scarcity only affects commodities such as oil. D) Scarcity generally doesn't affect our day-to-day living.

C) Lee gives his children candy if they behave during dinner.

Which of the following situations illustrates an incentive? A) Dave snacks all afternoon and isn't hungry for dinner. B) Dirk's children misbehave during dinner. C) Lee gives his children candy if they behave during dinner. D) Jaime goes to a restaurant for dinner.

D) marginal benefits ≥ marginal costs.

With regards to marginal thinking, an individual will do an action if A) the probability of success is greater than 50 percent. B) the action has positive benefits. C) the costs of the action are small. D) marginal benefits ≥ marginal costs.

market

bring the buyers and sellers together to exchange goods and services

marginal thinking

decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost. For example, have you ever wondered why people vacuum, dust, scrub the bathrooms, clean our their garages, and wash their windows, but leave the dust bunnies under the refrigerator? If you moving the refrigerator out from the wall to clean requires lots of effort for a small benefit. Most of us ignore the dust bunnies and just clean the visible areas of our homes. "the marginal cost of cleaning under the refrigerator is too high, and the added value of making the effort,or the marginal benefit is too low to justify the additional cleaning."

negative incentives

discourage action by providing undesirable consequences or punishments. For example, the fear of receiving a speeding ticket keeps motorists from driving too fast, higher oil prices might motivates more customers to use less oil, and the fear of a trip to the dentist motivates people to brush their teeth regularly.

positive incentives

encourage action by offering rewards or payments. For example, end of year bonuses motivate employees to work hard throughout the year, higher oil prices cause suppliers to extract more oil, and tax rebates encourage citizens to spend more money.

incentives

factors that motivate you to act or exert effort. Example, your choice to study for an exam you have tomorrow instead of spending the evening with your friend is based on your belief that doing well on the exam will provide a greater benefit.

five foundations of economics

incentives, opportunity costs, trade-offs, marginal thinking, and trade create value

economic thinking

involves a purposeful evaluation of the available opportunities to make the best decision possible

barter

involves individuals trading a good they already have or providing a service in exchange for something they want

indirect incentives

kind of incentive that is difficult to recognize "Suppose you work in welfare programs. Almost everyone agrees that societies should provide a safety net for those without employment or whose income isn't enough to meet their basic needs."

direct incentives

kind of incentive that is easy to recognize "Cut my grass and I will pay you $30."

double confidence of wants

occurs when each party in an exchange transaction has what the other party desires For example, when you are hungry and plan to get something to eat, you got a jab at subway restaurant. You use the money that you paid at work for a sandwich. When you get home, you get a call from your land-lord to pay him a rent. You offer him sandwiches every other day instead of paying him them money, he agrees. Unfortunately, the cable company bill you for your cable, you also offer food from subway, but it wants to be paid because its service trucks don't run on sandwiches. You need to find someone else to trade sandwiches for gasoline so you can pay your cable bill.

Unintended consequence

people who were supposed to use government assistance as a safety net until they can find a job use it instead as a permanent source of income.

circular flow

shows how resources and final goods and services flow through economy > households > resource market > firms > product market >

opportunity cost

the highest valued alternative that must be sacrificed to get something else For example, you get two invitations to the concert and hiking at the same time, but you have to choose one of these options, so if you prefer going to a concert (option that gives you the largest benefit), you should go because it has larger benefit than going to the hike. You have to give up the hiking because it has less value to you than the concert, so it has lower opportunity cost.

scarcity

the limited nature of society's resources, given society's unlimited wants and needs

comparative advantage

the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can.

economics

the study of how individuals and societies allocate their limited resources to satisfy their nearly unlimited wants

microeconomics

the study of the individual units that make up the economy, such as households and businesses

macroeconomics

the study of the overall aspects and workings of an economy, such as inflation (an overall increase in prices), growth, employment, interest rates, and the productivity of the economy as a whole

trade

the voluntary exchange of goods and services between two or more parties

trade-off

we will make more informed decisions about how to utilize our scare resources