Economics Chapter 1

What is the total economic surplus?

The difference between total benefits and total costs. The goal should be to make the total economic surplus as large as possible.

Three goals of Economics

1. Economics: Study of how people make decisions and how their decisions effect them 2. Positive Statements v. Normative Statements -Positive: describes the world how it IS -Normative: Opinion based; could never be proven 3. How Do Economists Model Human Behavior -Focus on rational decision makers -Total Benefits gains that a person realizes from an action or outcome -Total Costs burdens that a person incurs from an action or outcome

What does it mean to be self interested?

A self-interested person places more weight on his/her own priorities rather than on the priorities of others

Positive Statements

Are factual and describe how the world is. They can be proved to be either true or false.

Direct government impact can?

Alter costs and benefits and in turn change behavior

What are total costs?

Burdens that a person incurs from an action or outcome

How do economists model human behavior?

By focusing on rational decision makers (someone with goals and who takes action to achieve them).

Which of the following would be a part of macroeconomics? a) A study of the change in automobile sales due to a change in the price of automobiles. b) A study of the impact of a tax reduction on the profits of a business. c) A study of recessions. d) A study of the unemployment of workers displaced by technological change in the typesetting industry.

C) A study of recessions

The Incentive Principle states that? A) a society can produce a greater amount of total output when individuals focus their production on those activities for which they have a comparative advantage. B) having more of one thing usually means getting by with less of something else C) an action should be taken if and only if the additional benefits from taking the action are at least as great as the additional costs of doing so. D)if the marginal benefit of an activity increases, then a rational person will engage in more of the activity.

D) if the marginal benefit of an activity increases, then a rational person will engage in more of the activity.

In July 2012 professional golfer Adam Scott bogeyed the last four holes of the British Open to lose the tournament to Ernie Els by one stroke. Around the same time flooding in Beijing, China resulted in the death of at least 77 people. If Adam was more upset about the outcome of the British Open than about the loss of life from the flooding in Beijing, then it would seemingly suggest that he A) is not as good of a person as Ernie Els. B) does not care about anyone other than himself. C) is an irrational individual. D) is a self-interested individual.

D) is a self-interested individual.

What is the result of the government having a direct impact on costs and benefits?

Individual behavior will often change so that the impact of the policy is NOT exactly what might have been expected or intended.

What are total benefits?

Gains that a person realizes from an action or outcome

What is the "Incentive Principle"?

If there is an increase in marginal benefits of a certain activity then a rational person would engage in more that activity. If the marginal costs of an activity increases then a rational person would engage in less of that activity

Tradeoffs

More of one item= less of another

Normative Statements

Statements that are opinion based and can't be proven true or false

What is the goal of economic surplus?

To get the largest spread between total benefits and total costs.

What is the goal of the cost benefit principal?

To make marginal benefits greater than or equal to marginal costs

Scarcity

Unlimited wants v. limited resources (time, income)

What is the Cost benefit principal?

When a rational decision maker undertakes an activity if the marginal benefit of doing so is greater than the marginal cost of doing so

Total Economic Surplus

difference between Total Benefits & Total Costs

Macroeconomics

study of a society's economy as a whole

Microeconomics

study of how individuals behave and interact with each other

Cost-Benefit Principle

you will do something if and only if the benefit is greater than the cost