CHP 1

firms produce goods and services at the lowest cost.

*Productive* efficiency is achieved when

1) People are rational. 2) People respond to economic incentives 3) Optimal decisions are made at the margin

3 Key Economic Ideas

C. marginal revenue

A grocery store sells a bag of potatoes at a fixed price of $2.30. Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes? A. pure profit B. net benefit C. marginal revenue D. marginal costs E. gross earnings

Occurs when production is in accordance with consumers preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

Allocative efficiency

C. At least $125,000

Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity cost of her decision? A. The value she attributes to the satisfaction she receives from taking care of her parents B. zero, since she will no longer be earning a salary C. At least $125,000 D. It depends on the "going rate" for home-care providers.

the choices people make to attain their goals, given their scarce resources.

By definition, economics is the study of

is a simplified version of some aspect of economic life used to analyze an economic issue.

Economic *Model*

even though people may not behave rationally all the time

Economists assume that rational behavior is useful in explaining choices people make

the economy as a whole.

Macroeconomics is the study of

Is the additional revenue that will be generated by increasing product sales by 1 unit

Marginal Revenue

until its marginal benefits equal marginal costs

Marginal analysis involves undertaking an activity

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Market

how households and firms make choices how they interact interact in markets how the government attempts to influence their choices

Microeconomics is the study of

Analysis concerned with what ought to be - Opinionated reactions toward economic projects, statements, and scenarios

Normative economic statement

The highest valued alternative that must be given up to engage in a activity

Opportunity Cost

/Marginal/ "extra" or "additional" Economist reason that the optimal decisions is to continue any activity up the point where the Marginal Benefit=Marginal Cost ex: additional benefit with one hour of watching TV is worth the additional cost you pay not spending that time studying for an exam

Optimal Decisions Are Made at the Margin

-It means that economists assume consumers and firms use all available information as they act to achieve their goals. -Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the cost.

People Are Rational

-Price of certain amounts is a big incentive -those that concern material reward

People Respond to Economic Incentive

-Analysis concerned with what is -Measures the costs and benefits of different course of action

Positive Analysis (Pos. Economic Statement)

refers to the situation in which unlimited wants exceed limited resources.

Scarcity

B. people respond to economic incentives.

Suppose the U.S. government encouraged consumers to trade in their old automobiles for more efficient, new models by [[paying up to $5,000 for the old automobiles.]] These consumers would be exemplifying the economic idea that A. people are rational. B. people respond to economic incentives. C. optimal decisions are made at the margin. D. equity is more important than efficiency.

an additional unit

The revenue received from the sale of ________ of a product is a marginal benefit to the firm.

The idea that, because of scarcity, producing more of one good or service means producing less another good or service

Trade-off

both the buyer and the seller of a product are made better off by the transaction

Voluntary exchange

Allocative efficiency

Voluntary exchange between buyers and sellers generates ________ in a market economy.

C. The price of gasoline is too high.

Which of the following is a normative economic statement? A. The current high price of gasoline is the result of strong worldwide demand. B. When the price of gasoline rises, the quantity of gasoline purchased falls. C. The price of gasoline is too high. D. When the price of gasoline rises, transportation costs rise

C. If the price of iPhones falls, a larger quantity of iPhones will be purchased.

Which of the following is a positive economic statement? A. The U.S. government should not have bailed out U.S. auto manufacturers. B. The government should revamp the health care system. C. If the price of iPhones falls, a larger quantity of iPhones will be purchased. D. The standard of living in the United States should be higher.