Econ Chap 1

Consider Frank's decision to go to college. If he goes to college, he will spend $21,000 on tuition, $11,000 on room and board, and $1,800 on books. If he does not go to college, he will earn $16,000 working in a store and spend $7,200 on room and board. Frank's cost of going to college is

$42,600

In the short run, which of the following rates of growth in the money supply is likely to lead to the lowest level of unemployment in the economy?

9 percent per year

Principle 8

A Country's Standard of Living Depends on Its Ability to Produce Goods & Services

Principle 7

Governments Can Sometimes Improve Market Outcomes

Economists study

How people make decisions, how people interact with one another, the forces and trends that affect the economy as a whole.

A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages?

Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.

Principle 6

Markets Are Usually A Good Way to Organize Economic Activity

Principle 1

People Face tradeoffs (no free lunch)

The principles of decision making are

People face tradeoffs, The cost of any action is measured in terms of foregone opportunities, Rational people make decisions by comparing marginal costs and marginal benefits, People respond to incentives.

A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?

People respond to incentives

Principle 4

People respond to incentives

principle 9

Prices Rise When the Government Prints Too Much Money

The principles of the economy as a whole are

Productivity is the ultimate source of living standards, Money growth is the ultimate source of inflation, Society faces a short-run tradeoff between inflation and unemployment.

Principle 3

Rational People think at the Margin

principle 10

Society Faces a Short-run Tradeoff Between Inflation and Unemployment

Principle 2

The Cost of Something Is What You Give Up to Get It

After much consideration, you have chosen Ireland over Spain for your Study Abroad program next year. However, the deadline for your final decision is still months away and you may reverse this decision. Which of the following events would prompt you to reverse this decision?

The marginal benefit of going to Spain increases.

Acme Home Builders, Inc., has built 24 houses so far this year at a total cost to the company of $4.80 million. If the company builds a 25th house, its total cost will increase to $5.05 million. Which of the following statements is correct?

The marginal cost of the 25th house, if it is built, will equal $250,000.

Economics

The study of how society manages its scarce resources

The principles of interactions among people are:

Trade can be mutually beneficial, Markets are usually a good way of coordinating trade, Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable.

Principle 5

Trade can make everyone better off

Market

a group of buyers and sellers

Market power

a single buyer or seller has substantial influence on market price (e.g. monopoly)

When society requires that firms reduce pollution, there is

a tradeoff because of reduced incomes to the firms' owners and workers

market economy

allocates resources through the decentralized decisions of many households and firms as they interact in markets

Suppose that a country that has a high average wage level agrees to trade with a country that has a low average wage level. Which country can benefit?

both

A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society faces a tradeoff between

efficiency and equality.

Important tradeoff

efficiency vs. equality

To improve living standards, policymakers should

formulate policies designed to increase productivity.

Tradeoff

giving up one thing to get something else

Suppose that in Brazil total annual output is worth $600 million and people work 30 million hours. In Peru total annual output is worth $800 million and people work 50 million hours. Productivity is higher

in Brazil. Most variation in the standard of living across countries is due to differences in productivity.

A company that formerly produced music CDs went out of business because too many potential customers bought illegally-produced copies of the CDs instead of buying the product directly from the company. This instance serves as an example of

inadequate enforcement of property rights

In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker

increased by 6.25 percent between 1998 and 2008

inflation

increases in the general level of prices

marginal changes

incremental adjustments to an existing plan

In less than two years in the early 1920s, the cost of a German newspaper rose from 0.30 marks to 70,000,000 marks. This is a spectacular example of

inflation caused by an increase in the quantity of money in the economy.

Prices direct economic activity in a market economy by

influencing the actions of buyers and sellers.

Marginal Cost

is the opportunity cost of a one unit increase in an activity.

Benefits from trade would not include

less competition

The adage, "There is no such thing as a free lunch," is used to illustrate the principle that

people face tradeoffs.

In a market economy, economic activity is guided by

self-interest and prices.

incentives

something that induces act, i.e. the prospect of a reward or a punishment

Rational people

systematically and purposefully do the best they can to achieve their objectives.

Suppose the Federal Reserve announces that it will be making a change to a key interest rate to increase the money supply. This is likely because

the Federal Reserve is worried about unemployment

productivity

the amount of goods and services produced per unit of labor.

Scarcity

the limited nature of society's resources

A rational decision maker takes an action if and only if

the marginal benefit of the action exceeds the marginal cost.

inflation increases

unemployment decreases

"Organize economic activity"

what goods to produce, how to produce them, how much of each to produce,who gets them

Marginal benefit

what you gain when you get one more unit of something

opportunity cost

whatever must be given up to obtain it.

Equality

when prosperity is distributed uniformly among society's members

Efficiency

when society gets the most from its scarce resources

Market failure:

when the market fails to allocate society's resources efficiently

Externalities

when the production or consumption of a good affects bystanders (e.g. pollution)