CH 1: WHAT IS ECONOMICS

Benefit

A benefit is that which is gained by making a choice. It is determined by individual preferences and is operationally measured as the most one is willing to pay for a good or service.

Social interest

A choice demonstrates social interest when it leads to the best outcome for society as a whole.

Self-interest

A choice reflects self-interest if it is the best available option for the entity making that choice.

Distinguish between a positive statement and a normative statement.

A positive statement is about what is and is testable. A normative statement is about what ought to be and is not testable because there is no universally approved criterion by which the statement can be judged.

Rational choice

A rational choice is one that achieves the greatest benefit for the least cost. It involves comparing costs and benefits.

Economic model

An economic model is a description of some aspect of the economic world based on positive statements that is tested by comparing its predictions with facts. It includes only those features necessary for its purpose.

Incentive

An incentive is a reward or penalty that influences actions/choices.

Capital

Capital refers to the tools, instruments, machines, buildings, etc. used in the production of goods and services.

Economics

Economics studies the choices entities make as they cope with scarcity and the incentives that influence and reconcile these choices.

Efficiency

Efficiency refers to the point of production at which resources are best allocated so that goods and services are produced at the lowest cost and in quantities that give the greatest benefit.

Entrepreneurship

Entrepreneurship is the human resource that organizes land, labour and capital.

Factors of production (4)

Factors of production are the means by which production occurs. 1. Land 2. Labour 3. Capital 4. Entrepreneurship The sale of these four factors of production generate income.

Goods and services

Goods and services are objects produced to satisfy human wants.

Human capital

Human capital is the knowledge and skill that determines the quality of labour.

Interest

Interest is the income generated by the sale of capital.

Apple, Inc. decides to make iTunes freely available in unlimited quantities. Is Apple's decision an example of a microeconomic or macroeconomic issue?

It is an example of a microeconomic issue because it affects a single company and a single market.

Labour

Labour refers to the work time and work effort put in to the production of goods and services. Its quality is determined by human capital.

Land

Land is the natural resources used to produce goods and services. ("gifts of nature"

Macroeconomics

Macroeconomics is the study of the performance of national and global economies.

Marginal benefit

Marginal benefit is the benefit that arises from an increase in an activity.

Marginal cost

Marginal cost is the opportunity cost of an increase in an activity.

Explain how the following news headline concerns self-interest and social interest: "McDonald's moves into gourmet coffee"

McDonald's decision to serve gourmet coffee is a decision made by McDonald's to further McDonald's interest. The decision is directly in McDonald's self-interest. The social interest is affected because more people will drink coffee rather than other drunks such as tea.

Microeconomics

Microeconomics is the study of the choices of individuals and businesses, how these choices interact in markets, and how governments influence these actions.

Profit

Profit is the income generated from entrepreneurship.

Rent

Rent is the income generated from the sale of land.

Scarcity

Scarcity refers to the inability to satisfy human wants. A resource is said to be scarce if it is limited.

Explain how the following news headline concerns self-interest and social interest: "Starbucks expands in China"

Starbucks' expansion is a decision made by Starbucks to further Starbucks' interest. The decision is directly in Starbucks' self-interest. The social interest is affected because Starbucks' expansion will have an effect in China. Ex. More Chinese might drink coffee rather than tea and fewer coffee shops run by Chinese firms might open.

Which of the following statements are positive? 1. The federal government should increase production of biofuels. 2. Air travel has increased since September 11. 3. The greatest number of accidents are caused by drunk drivers. 4. We ought to have a cure for cancer.

Statements 2 and 3 are positive.

Explain how the following news headline concerns self-interest and social interest: "Food must be labelled with nutrition data"

The decision to require that food must be labelled with nutrition information is made in the social interest. This decision is not made by any one single firm and so does not necessarily reflect anyone's self-interest.

When Costco opened a gas bar just off Highway 401, the neighbourhood was swamped with cars as drivers lined up to get the discount of 10 cents a litre. What is the opportunity cost of a litre of gas?

The opportunity cost is a combination of the best alternative you could have spent money on rather than buying gas as well as the time you could have spent doing something other than buying gas.

Opportunity cost

The opportunity cost is the highest valued alternative to a choice made.

Wages

Wages are the income generated from the sale of labour.

Which of the following statements is positive, which is normative, and which can be tested? a) Canada should cut its imports b) China is Canada's largest trading partner c) The federal govt should increase the production of biofuels

a) Canada should cut its imports -- normative and cannot be tested b) China is Canada's largest trading partner -- positive and testable c) The federal govt should increase the production of biofuels -- normative and cannot be tested

Which of the following statements is normative? a) Scientists should not make normative statements. b) Warts are caused by handling toads. c) As e-book prices fall, people buy more of them. d) If income increases, sales of luxury goods fall. e) There is more caffeine in a cup of tea than in a cup of coffee.

a) Scientists should not make normative statements.

Which one of he following topics does microeconomics study? a) reasons for a fall in the price of orange juice b) the effect of a rise in the Canadian dollar on Canada's exports c) effect of interest rates on national economic growth d) effect of the government budget deficit on employment e) determination of total production in a country

a) reasons for a fall in the price of orange juice

Rebecca will choose to eat a seventh pizza slice if a) the marginal benefit from the seventh slice is greater than its marginal cost. b) the marginal benefit from the seventh slice is less than its marginal cost. c) the total benefit from all seven slices is greater than their total cost. d) the total benefit from all seven slices is less than their total cost. e) she has enough money to pay for it.

a) the marginal benefit from the seventh slice is greater than its marginal cost

Which of the following is a microeconomic topic? a) the reasons why a consumer buys less honey b) the reasons why the average price level in a country falls c) the cause of increasing unemployment d) the effect of the government budget deficit on inflation e) the reasons why the labour force in a country decreases

a) the reasons why a consumer buys less honey

The Russian government spent $6.7 billion on Olympic facilities and $16.7 billion upgrading Sochi area infrastructure. Sponsors spent $27.6 billion on hotels and facilities hoping to turn Sochi into a year-round tourist magnet. Was the opportunity cost of the Sochi Olympics: a) $6.7 billion? b) $23.4 billion? c) $51 billion?

b) $23.4 billion. The opportunity cost of something is the highest-valued alternative that is given up. To host the Olympics in Sochi, $6.7 billion was spent on Olympic facilities and $16.7 billion was spent upgrading Sochi area infrastructure. The opportunity cost of the Sochi Olympics is the goods and services that would have been purchased with the $23.4 billion if the money was not spent on the Sochi Olympics. The $27.6 billion spent on hotels and facilities was money spent by hotel resort owners to build a resort for future profit. It is not part of the opportunity cost of staging the Olympics.

Chanel has the option of purchasing one of three products: Brand A, Brand B, or Brand C. The price of each product is $10. If Chanel decides to purchase Brand A, the opportunity cost of the decision is a) $20 b) Brand B or Brand C, depending on which she considers to be the highest-valued alternative forgone. c) Brand A. d) Brand B and Brand C. e) zero if this is a frivolous purchase with no marginal benefit.

b) Brand B or Brand C, depending on which she considers to be the highest-valued alternative.

Which of the following is an example of a positive statement? a) Canada should cut back on its use of carbon-based fuels such as coal and oil. b) Increasing the minimum wage results in more unemployment. c) Every Canadian should have equal access to healthcare. d) The Bank of Canada ought to cut the interest rate. e) Canada should have lower tax rates for wealthier Canadians.

b) Increasing the minimum wage results in more unemployment.

The fact that human wants cannot be fully satisfied with available resources is called the problem of a) opportunity cost. b) scarcity. c) normative economics. d) marginal cost. e) the big tradeoff.

b) scarcity

A star athlete can afford a garage full of exotic cars while other people can only afford to take a city bus for transportation. This is an example of an economy facing the ____ question. a) "what" b) "how" c) "for whom" d) "where" e) "when"

c) "for whom"

Which of the following statements is correct? a) Canada produces more manufactured goods than services. b) Canada produces more agricultural goods than services. c) Canada produces more services than goods. d) The percentage of the Canadian population that produces goods is greater than the percentage of the Chinese population that produces goods. e) Canada produces more agricultural goods than manufactured goods.

c) Canada produces more services than goods.

An incentive a) could be a reward but could not be a penalty. b) could be a penalty but could not be a reward. c) could be either a reward or a penalty. d) is the opposite of a tradeoff. e) occurs in the macroeconomy but not in the microeconomy.

c) could be either a reward or a penalty

Model A is superior to model B if a) it contains more real-world detail than model B. b) it contains fewer unrealistic assumptions than model B. c) its predictions correspond more closely to the facts than the predictions of model B. d) it is preferred by a majority of researchers in a public opinion poll. e) it is scientifically "elegant".

c) its predictions correspond more closely to the facts than the predictions of model B.

Complete the following sentence. Financial capital is a) one of the "gifts of nature" b) the tools and machines that are used to produce goods and services. c) money, stocks, and bonds d) used in the production of goods and services. e) land.

c) money, stocks and bonds

To earn income, people sell the services of the factors of production they own. Land earns ____ and labour earns ____. a) profit; wages b) wages; interest c) rent; wages d) profit; interest e) rent; minimum wage

c) rent; wages

Complete the following sentence. Capital is a) money in the bank. b) the "gifts of nature." c) the tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services. d) land. e) stocks and bonds

c) the tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services

Which of the following sayings best describes opportunity cost? a) "Make hay while the sun shines" b) "Love of money is the root of all evil" c) "Boldly go where no one has gone before" d) "There's no such thing as a free lunch" e) "Baseball has been very good to me"

d) "There's no such thing as a free lunch"

Which of the following pairs does not match? a) Labour and wages b) Land and rent c) Entrepreneurship and profit d) Capital and profit

d) Capital and profit Capital earns interest, not profit.

Which of the following newspaper headlines concerns a macroeconomic issue? a) Why are people buying more SUVs and fewer minivans? b) How would a tax on e-commerce affect chapters.indigo.ca? c) How would an unexpected freeze on Oxford, Nova Scotia change the price of blueberries in the Maritimes? d) Why is Japan's economy stagnant? e) Why do grain producers purchase less pesticides?

d) Why is Japan's economy stagnant?

Complete the following sentence. Entrepreneurship is a) defined as money. b) traded on the stock market. c) categorized as capital. d) the human resource that organizes labour, land and capital. e) categorized as the factor of production labour.

d) the human resource that organizes labour, land and capital.

A positive statement is a) always true. b) always false. c) about what ought to be. d) what is currently believed about the way the world operates. e) an opinion that cannot be verified.

d) what is currently believed about the way the world operates.

To meet increased demand for its good, a firm decides to hire a few high-skilled workers, rather than hire many low-skilled workers. The firm is answering the _____ question. a) "when" b) "what" c) "who" d) "where" e) "how"

e) "how"

The two big economic questions a) involve self-interest only. b) involve only social interest. c) involve neither self-interest nor social interest. d) do not arise from scarcity. e) involve both self-interest and social interest

e) involve both self-interest and social interest