Chapter One Micro Study Guide

What is scarcity? What are two elements that comprise scarcity? How do they affect relative scarcity?

-scarcity happens when there are not enough goods available to satisfy individuals' desires -scarcity has two elements: our wants and our means of fulfilling those wants -because each of those elements can change, relative scarcity can also change -if we can reduce our wants, relative scarcity will be reduced -if we can increase our efforts to produce more goods or if technological changes allow people to produce more using the same resources then relative scarcity will be reduced

What are the three central problems that every economy must solve?

1. what and how much to produce 2. how to produce it 3. whom to produce

What is the opportunity cost of working through this study guide?

It could be he increase in the grade I would have received by studying for another exam or the money I could have earned if I was working.

Assume you have purchased a 15,000$ car. The salesperson has offered you a maintenance contract covering all major repairs for the next 3 years, with some exclusions. for 750$. What is the opp cost of purchasing this contract?

The opp cost of purchasing the maintenance contract is the benefit I could receive by spending that 750$ on something else, like a sun roof.

You bought stock A for 10$ and stock B for 50$. The price of each is currently 20$. Assuming no tax issues, which should you sell if you need money?

When making economic decisions you consider that only costs from this point on are relevant; historical costs are sunk costs and therefore have no relevance. Since the prices of the stocks are currently the same, it doesn't matter which you sell.

What is the definition of experimental economics?

a branch of economics that studies the economy through controlled laboratory experiments

What is an economic policy?

an action taken by the government to influence government actions

What is the definition of a market force?

an economic force that is given relatively free rein by society to work through the market

What is the opportunity cost of going out on a date Tonight that was scheduled last Wednesday?

the opportunity cost of going on date tonight that was scheduled last Wednesday is the benefit forgone of the best alternative. If my best alternative as to study for an economics exam, it would be the increase in my exam grade that I would have otherwise gotten had I studies.

What is the opportunity cost of breaking the date for tonight that you made last Wednesday?

the opportunity cost of going out on a date tonight that was scheduled last Wednesday is the benefit forgone of going on that date. It would have been fun if I went on that date.

What is the definition of the invisible hand? What is the invisible hand theorem?

the price mechanism, the insight that a market economy, through the price mechanism, will allocate resources efficiently

What is the definition of economics?

the study of how we coordinate our wants

What are positive economics?

the study of what is, and how the economy should work

What is normative economics?

study of what the goals of economy SHOULD be

What is the definition of marginal benefits?

the additional benefit above what you have already derived

What is the definition of the art of economics?

the application of the knowledge learned in positive economics to the achievement of the goals determined in normative economics

In the textbook, the author focuses on coordination rather than scarcity as the central point of the definition of economics because:

the author wants to emphasise that quantity of goods and services depends on human action and ability to coordinate human action

In the US economy, who is in charge of organising and coordinating overall economic activities?

the invisible hand of the market cordinates the activites and is a composite of many individuals rather than just any one individual. i

Rationing devices that our society uses include:

the invisible hand, social and political forces -the invisible hand works through the market and is focused on economics -social works though social control like societal norms -political forces=government

What is the difference between theorems and precepts?

theorems are based on models while precepts add knowledge of real-world institutions and judgment

What are political forces?

legal directives that direct indivudal's actions

What is the importance of opportunity cost to economic reasoning?

-It is the basis of cost/benefit economic reasoning - takes into account the benefits of all other options, and converts alternative benefits into costs of the decision you're now making -in economic reasoning, opportunity cost will be less than the benefit of what you have chosen

What is an economic force? What are the forces that can keep an economic force from becoming a market force?

-an economic force is the necessary reaction to scarcity -all scarce goods must be rationed in the same way -if an economic force is allowed to work through the market, that economic force becomes a market force -social and political forces can keep economic forces from becoming market forces

Based on this information how would you make your decision?

-benefits of contract are covering the cost of future repairs and knowing that your covered in the future by the contract -cost is the opp cost of using 750$ in a another way -decision does not include sunk costs bc not relevant -if benefit exceeds costs, then do it -if costs exceed benefits, don't do it

What is the economic decision rule?

-if the marginal benefits of doing something exceed the marginal costs then you should do it -if the marginal costs of doing something exceed the marginal benefits

Define positive economics, normative economics, and the art of economics. How do they relate to each other?

-positive economics is the study of what is and how the economy works -normative economics is the study of what the goals of the economy should be -the art of economics is the application of the knowledge learned in positive economics to the achievement of the goals determined in normative economics

Define opportunity cost:

-the benefit forgone by undertaking an activity -the next best alternative to the activity you have chosen -it is something you have to give up in order to get something else

Assume you have purchased a 15,000$ car. The salesperson has offered you a maintenance contract covering all major repairs for the next 3 years, with some exclusions. for 750$. What sunk cost of purchasing the maintenance contract? Should this sunk cost be considered when deciding to purchase a maintenance contract?

-the cost of the car bc its been incurred and can't be recovered -sunk costs should always b ignored when making a current decision bc only marginal costs are relevant to the current decision

Assume you have purchased a 15,000$ car. The salesperson has offered you a maintenance contract covering all major repairs for the next 3 years, with some exclusions. for 750$. What information would you need to make a decision based on the economic decision rule?

I would need to know the benefit of the maintenance contract to asses whether the cost of $750$ is worthwhile.

What is the economic decision rule?

If the marginal benefits of doing something exceed the marginal costs, do it. If the marginal costs of doing something exceed the marginal benefits, don't do it.

How does microeconomics differ from macro-economics? Give an example of a macro economic issue and a microeconomic issue?

Micro is the study of how individual choice is influenced by economic forces. -focuses on a particular segment of the economy - how a specific market price and quantity sold is determined Macro is the study of the economy as a whole -considers the problem of inflation, unemployment, business cycles and growth

"How the unemployment and inflation rates are related" is an example of micro or macro?

macroeconomics because macro is concerned with inflation, unemployment, business cycles and growth

What is the definition of an economic model?

a framework that places the generalised insights of a theory in a more specific contextual setting.

Is the statement, :" the distribution of income should be left to the market", is:

a normative statement, normative deals with SHOULD be statements,

The statement, "Given certain conditions, the market achieves efficient results" is an example of:

a positive statement, statement about WHAT IS and not what should be

Is "Because people find the selling of babies repugnant, government should ban their sale because the invisible hand will not be efficient.

a precept since it adds knowledge of social mores to the invisible hand theorem

Is "The price mechanism tends to allocate resources efficiently" a theorem or a precept?

a theorem because it is logical conclusion of model

What is the definition of efficiency?

achieving a goal as cheaply as possible

What is the definition of marginal cost?

addition cost above what you have already incurred

In arriving at a decision, a good economist would say that:

after one has considered marginal costs and benefits, one should integrate the social and moral implications and reconsider those costs and benefits

What is a sunk cost?

cost that has already been incurred and cannot be recovered

What is the definition of an implicit cost?

costs associated with a decision that often aren't included in normal accounting costs

What force is "Warm weather arrives and more people take Sunday afternoon drives. As a result, the price of gasoline rises"?

economic force example

"The effect of a flood in the Midwest on the price of bottled water" is an example of macro or micro?

example of micro micro- study of individuals and individual markets macro- concerned with inflation, unemployment, business cycles, and growth

What is the defintion of social forces?

forces that guide individual actions even though those actions may not be in an individual's self-interest

What is the definition of economic decision rule?

if benefits exceed costs, do it. If costs exceed benefits, don't.

Scarcity could be reduced if:

individuals work more and want fewer consumption goods bc scarcity depends upon our wants and our means of fulfilling those wants

When making economic decisions you should consider:

marginal costs and benefits, the economic decision rule is "If marginal benefits exceed marginal costs, do it." The relevant benefits and costs to be considered at marginal (additional) costs and benefits.

What is an economic force?

necessary reactions to scarcity

In deciding whether to go to lectures in the final weeks of the semester, you should:

not include tuition as part of the cost of that decision, you only look at costs from this point on, sunk costs are sunk costs so tuition can be forgotten. Economic decisions focus on foward-looking marginal costs and marginal benefits.

The opportunity cost of reading one chapter of a 38 chapter book is what?

nothing to do with price you paid because that is a sunk cost, the opp cost is the value of time you're spending on it, which is determined by what you could be doing with that time otherwise

What force is "in some states, liquor cannot be sold before noon on Sunday"?

political force example

What force is "minors cannot purchase cigs"?

political force, as it is a federal law

Individuals are prohibited from practicing medicine without a license. The legal prohibition is a direct example of:

political forces are law forces

What is the definition of theorem?

propositions that are logically true based on the assumptions in a model

Economic reasoning:

provides a framework with which to approach questions,

What is the definition of a precept?

rules that conclude that a particular course of action is preferrable

What happens to scarcity for the following good? More students desire to live in single-sex dorms. No new single-sex dorms are established.

scarcity of single-sex dorm rooms will rise since the number of students desiring single-sex dorm rooms has risen, but the number available has not

What happens to scarcity for the following good? New storage technology allows college dining services to keep peaches from rotting for a long time.

scarcity will fall because fewer peaches will rot

If at Female College there are significantly more females than males ( and not a significant number of gays or off-campus dating opportunities ), economic forces:

will likely push for females to pay for dinner on dates, -if there are significantly more of one gender than another, dates with that group must be rationed out among the other group -economic forces will be pushing in that direction even though historical forces may push in opposite direction -even if males pay bc social forces, economic forces will be pushing for females to pay