Ch 1 The Core of Economics

opportunity cost

what you must give up in order to get it - is its true cost

Margo spends $10,000 on one year's college tuition. The opportunity cost of spending one year in college for Margo is:

whatever she would have purchased with the $10,000 plus whatever she would have earned had she not been in college.

If every individual were required to be self-sufficient

living standards would fall.

The seaport town of New Monopoly has become extremely popular with shipping companies due to its superior location. The port has become so congested that ships must wait hours every day just to dock. This is an example of? Part 2 - The mayor realizes that the congestion at the port costs the shipping companies and his town money. Which decision would NOT move him towards a command economy?

market failure, the mayor decides to let individuals firms and consumers find a solution for the excessive time wait.

trade off

when you compare the costs with the benefits of doing something

Sometimes the government varies its spending, depending on the needs of the country. This statement best represents the economic concept that:

government policies can change spending

in a market economy, individuals economic lives are said to be

interrelated with many other individuals and firms

resource

is anything that can be used to produce something else

incentive

is anything that offers rewards to people who change their behavior.

individual choice

is the decision by an individual of what to do which necessarily involves a decision of what not to do.

an economy id efficient if

it takes all opportunities to make some people better off without making other people worse off.

you decide to forgo partying for 2 hours to study for an upcoming economics class, you learn the enjoyment you would have received from partying is an example of

opportunity cost

gains from trade

people can get more of what they want through trade than they could if they tried to be self-sufficient.

When individuals act in their own self-interest

society may be worse off in some cases.

you are assigned a final group project for you economics course. one member of your group is really good at finding resources for the project, one is really good at proofreading and editing, and you are really good at making a presentation. based on this you know that via (_____) you can complete the project more efficiently than if you all did each part together.

specialization

marginal analysis

study of marginal decisions

After swimming 100 laps at the pool, Erik decides to swim 10 more before lifting weights. This statement best represents this economic concept:

"How much" is a decision at the margin.

You decide whether to eat one more slice of pizza based on how hungry you feel. This statement best represents this economic concept:

"How much" is a decision at the margin.

Ed is taking off from work for 4 hours this afternoon and going to a baseball game. The ticket to the game costs $25 and it costs $15 to park at the stadium. Ed earns $15 an hour at his job. Ed's opportunity cost of going to the ball game is:

$100

the 12 principles of economics

1.Choices Are Necessary Because Resources Are Scarce 2. The True Cost of Something Is Its Opportunity Cost 3."How much" decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. 4.People Usually Respond to Incentives, Exploiting Opportunities to Make Themselves Better Off 5.There Are Gains from Trade 6.Because people respond to incentives, markets move toward equilibrium. 7.Resources Should Be Used Efficiently to Achieve Society's Goals 8.Because people usually exploit gains from trade, markets usually lead to efficiency. 9. When Markets Don't Achieve Efficiency, Government Intervention Can Improve Society's Welfare 10.One Person's Spending Is Another Person's Income 11.Overall Spending Sometimes Gets Out of Line with the Economy's Productive Capacity 12. Government Policies Can Change Spending

Britannia was a thriving empire in its golden age. Business was booming and they were the center of international trade under the leadership of the emperor. His empires pride and joy was the trading of green and black tea and decreed to have their entire economy built around it. however in the mid 1800s Britannia experienced a severe economic downturn when the other nations of the world created an embargo on tea from Britannia, which led to the civil strife due to thousands of workers being laid of. This is an example of?

A recession, macroeconomics

Ch 1 Summary

All economic analysis is based on a set of basic principles that apply to three levels of economic activity. First, we study how individuals make choices; second, we study how these choices interact; and third, we study how the economy functions overall. Everyone has to make choices about what to do and what not to do. Individual choice is the basis of economics—if it doesn't involve choice, it isn't economics. The reason choices must be made is that resources—anything that can be used to produce something else—are scarce. Individuals are limited in their choices by money and time; economies are limited by their supplies of human and natural resources. Because you must choose among limited alternatives, the true cost of anything is what you must give up to get it—all costs are opportunity costs. Many economic decisions involve questions not of "whether" but of "how much"—how much to spend on some good, how much to produce, and so on. Such decisions must be made by performing a trade-off at the margin—by comparing the costs and benefits of doing a bit more or a bit less. Decisions of this type are called marginal decisions, and the study of them, marginal analysis, plays a central role in economics. The study of how people should make decisions is also a good way to understand actual behavior. Individuals usually respond to incentives—exploiting opportunities to make themselves better off. The next level of economic analysis is the study of interaction—how my choices depend on your choices, and vice versa. When individuals interact, the end result may be different from what anyone intends. Individuals interact because there are gains from trade: by engaging in the trade of goods and services with one another, the members of an economy can all be made better off. Specialization—each person specializes in the task he or she is good at—is the source of gains from trade. Because individuals usually respond to incentives, markets normally move toward equilibrium—a situation in which no individual can make himself or herself better off by taking a different action. An economy is efficient if all opportunities to make some people better off without making other people worse off are taken. Resources should be used as efficiently as possible to achieve society's goals. But efficiency is not the sole way to evaluate an economy: equity, or fairness, is also desirable, and there is often a trade-off between equity and efficiency. Markets usually lead to efficiency, with some well-defined exceptions. When markets fail and do not achieve efficiency, government intervention can improve society's welfare. Because people in a market economy earn income by selling things, including their own labor, one person's spending is another person's income. As a result, changes in spending behavior can spread throughout the economy. Overall spending in the economy can get out of line with the economy's productive capacity. Spending below the economy's productive capacity leads to a recession; spending in excess of the economy's productive capacity leads to inflation. Governments have the ability to strongly affect overall spending, an ability they use in an effort to steer the economy between recession and inflation.

Which of the following statements is TRUE?

If a market is in equilibrium, there will be no remaining opportunities for individuals to make themselves better off.

When people want more goods and services than are available, the economy undergoes inflation. This statement best represents this economic concept:

Overall spending sometimes gets out of line with the economy's productive capacity.

Florida schools offered cash bonuses to students who scored high on the state's standardized exams. The cash bonuses are an example of this economic principle:

People usually take advantage of opportunities to make themselves better off

which of the following is NOT an example of a behavior exhibited in a market economy?

The president of the European country of semolina decrees that pasta must be consumed at all meals in a effort to help pasta makers.

The day to day living conditions of today are much different than they were 20th century. Charlie doing some web searching discovers that more houses today have electricity, air conditioning, and a car. What changed between the early twentieth century and present day that allowed this to happen? In what field to researchers investigate this phenomena?

There has been an economic growth in our society, economics

When a factory closes, why does it spell bad news for the local restaurants?

Unemployed factory workers have lower incomes and are less likely to dine out.

The federal government regulates how much carbon dioxide a factory can emit. This statement best represents this economic concept:

When markets don't achieve efficiency, government intervention can improve society's welfare.

a computer manufacturer slashes prices of its products following a competitors move involved _______ in prices so that the market moved __________ the equilibrium.

a reduction, away from

which of the following describes the equity-effeciancy trade off?

actions intended to make economic outcomes fairer can cause efficiency to decrease.

An economy is efficient when:

all opportunities to make some people better off without making other people worse off have been taken.

You are analyzing a trade-off when you compare the _____and _____ of doing something.

costs; benefits

marginal decisions

decisions about wether to do a bit more or a bit less of on activity

specialization

each person specializes in the task that he or she is good at performing.

while in class, you realize that there are more people in the classroom then there are seats. across the hall, you notice a large, empty lecture hall and wonder why the university is not operating at

efficiency

trade

in which people divide tasks among themselves and each person provides a good or service that other people want in return for different goods and services that he or she wants.

your economics professor os attempting to recruit more students to major in economics. she argues and presents data showing economic majors develops skills valuable in private industry, government, and research. she also argues that they earn a relatively higher income than the other majors. your professor is presenting you with (______) to major in economics.

incentives

Scarcity exists when

individuals can have more of one good but only by giving up something else.

you and other college students are deciding wether to major in music or engineering. you learn that there is a shortage of engineers making it easy for engineering graduates to find employment while there is a glut of musicians for whom finding a job is difficult. as a result you and many other college students decide to major in engineering. what principle does this illustrate?

markets tend to move towards equilibrium as individuals respond to incentives

If in Equitania, 20% of the population receive 80% of the income and the remaining 80% of the population receive 20% of the income, Equitania's economy:

may be efficient.

equity

means that everyone gets his or her fair share. Since people can disagree about what's "fair," equity isn't as well defined a concept as efficiency.

interaction of choices

my choices affect your choices, and vice versa—is a feature of most economic situations. The results of this interaction are often quite different from what the individuals intend.

Market failure occurs when:

ndividual actions have side effects that are not properly taken into account.

Corner offices in high-rise office buildings usually cost more to rent than other offices. This best illustrates the economic principle of:

scarce resources.

You have $1 to spend on a vending machine snack. A bag of chips will cost you $1 and a candy bar will also cost you $1. If you choose the bag of chips, the opportunity cost of buying the chips is:

the enjoyment you would have received from the candy bar.

Daniel has decided to open his own bakery using locally sourced ingredients and supplies. He provides income and jobs to local suppliers. He also provides his community with a place to buy delicious baked goods. This is an example of?

the invisible hand, microeconomics

When a chef prepares a dinner for a customer, which of the following is physical capital?

the oven

During economic downturns the number of Americans without jobs increases. According to the principle that one person's spending is another person's income:

the reduction in spending by the unemployed workers will further lower incomes.

economics is

the study of consumption, production, and distribution of goods and services.

an economy is

the system society uses to coordinate productive activities.

The five dollar burger joint gift card that your friend gave you expires today. You can either use the gift card to buy yourself dinner at the burger joint or stay home and eat a delicious home cooked meal. what is the opportunity cost of eating a home cooked meal?

the value of the ingredients of the home cooked meal and the value of the dinner at the five dollar burger joint.

Macroeconomics deals with:

the working of the entire economy or large sectors of it

a resource is scarce when

there's not enough of the resource available to satisfy all the ways a society wants to use it.