Lesson 1 Chapter 1 - Questions from assignment

Three fundamental questions that describe purpose of economic system

1) What 2) How 3) For whom

Three forms of economic systems

1. Traditional 2. Command 3. Market

Sunk cost

A cost that has already been incurred and cannot be removed. Such a cost is irrelevant to any current decision.

Theory

A simplified representation of how more variables interact with each other. Take complex, real-world issues and simplify it Interchangeable with term model

Fixed cost

Costs that do not change regardless of decision Think about room and board of college

Market economy

Decision making de-centralized Means of production are owned and operated by private individuals or groups What is supplied and what is demanded

Division of labor/3 reasons why it increases production efficiency

Divides labor up between people instead of all tasks being done by the same person. 1) Specialization 2) Learn how to produce quicker/with higher quality 3) Economies of scale - As level of production increases, avg cost of producing each individual unit declines

Command economy

Economic effort devoted to goals passed down from ruler Government decides what goods and services will be produced and what they will be charged for Ancient Egypt, Cuba, North Korea

Microeconomics

Focuses on the actions of individual agents within the economy, like households, workers, and businesses

Bartering

Form of trade

Three factors of production

Labor, capital, natural resources (land)

Macroeconomics

Looks at the economy as a whole. Focuses on broad issues such as growth of production, the number of employed people, the inflationary increase in prices, government deficits, and level of exports

Traditional economy

Oldest economic system Occupation stays in family, grow crops using traditional methods, what you produce is what you consume Asia, Africa, South America

Scarcity

Our wants are greater than our abilities to satisfy them

What is specialization and what does it require?

People have diff skills, talents, and interests, so they will be better at some jobs than others It requires trade (get paid for the job you're doing to purchase other goods)

Marginal benefit

The increase in benefits resulting from an action

Marginal cost

The increase in cost resulting from an action. Or the increase is costs resulting from producing one more unit of output.

Efficiency

The production of goods and services in a way that will maximize society's satisfaction, given the existing amount of economic resources available. An economy will produce what individuals want at the least possible cost.

Economics

The study of how choices are made in the face of scarcity

Opportunity cost

The value of a forgone opportunity The one best alternative to the choice we make

Market

Where we trade, where buyers and sellers gather to exchange things

A small clothing firm currently produces 50,000 shirts and bloused per month. The costs of its factory, raw materials, and labor is $500,000 per month. If the company is to increase production by 5,000 and that requires an additional labor and raw material expense of $100,000, what is the best estimate of costs of the increased production? a. $100,000 b. $400,000 c. $500,000 d. $600,000

a. $100,000

Last year, you purchased land to build a retail store. You paid $20 million for the land. Another business has now offered $8 million for the land and that is the highest price your business should now be able to get for the land. Which of the following costs is relevant for your decision as to whether or not you should build a new retail store? a. $8 million b. $12 million c. $20 million d. $28 million

a. $8 million

A classic movie about the end of the world showed a floating island on what the Pacific Ocean was. In the middle of movie filming, the set sank in a hurricane. The producers who had already spent $70 million on the set were faced with a new cost of $50 million to rebuild the set. Expected additional costs continued to be $100 million. The expected revenues were $160 million. Should they have rebuilt the set and finished the movie? a. Yes. The set sank. It is a sunk cost. b. No, the loss on the movies was $160 million minus $220 million, a loss of $60,000. c. One cannot tell. They may have thought that revenues would be higher. d. One cannot tell. They may have thought that costs from that point on might have been lower.

a. Yes. The set sank. It was a sunk cost.

You purchased a concert ticket for $50. There is no scalping market (AKA you can't sell it anywhere because it's illegal and people can still buy tickets at the box office). Also, the box office will not refund the ticket price once the ticket has been purchased. What is your opp cost of attending the concert? a. Zero, plus what would I have done with my time b. $50, plus what I would have done with my time c. $120, plus what would I have done with my time d. None of the above

a. Zero, plus what would I have done with my time

Is tuition a part of the cost of deciding to go to college? a. Yes b. No c. Part of room and board may be part of the cost

a. Yes

A small clothing firm currently produces 50,000 shirts and bloused per month. The costs of its factory, raw materials, and labor is $500,000 per month. If the company is to increase production by 5,000 and that requires an additional labor and raw material expense of $100,000, what is the cost per shirt before the increase in production? a. $5 b. $10 c. $20 d. $50 e. $100

b. $10

Some friends and I are heading to a concert. We have all purchased $50 tickets. I just realized that I lost my ticket on the Subway ride to the concert. I am confronted now with a decision of whether or not to buy a new ticket and go to the concert. Which of the following best describes that decision correctly? a. Is the concert worth paying $100 to attend? b. Is the concert worth paying $50 to attend? c. Is the concert worth paying $150 to attend?

b. Is the concert worth paying $50 to attend?

I am thinking about going out to visit some friends tonight. Given what I have learned in economics, I am comparing my costs with my expected profits. My alternatives in order of preference are to stay in my room and watch TV, stay in my room and study, have my friends over to my room, or go to bed early. What are the costs relevant to my decision? a. The benefits gained from going out to visit some friends. b. The benefits gained from staying in my room and watching TV c. The benefits gained from watching tv, studying economics, having my friends over, and going to bed early d. The benefits gained from one or two of the alternatives, but not all of them e. None of the above is correct

b. The benefits gained from staying in my room and watching TV

Good economic decision-making means which of the following? a. Comparing all benefits with all of the costs related to the production and enjoyment of a good b. Thinking about marginal benefits and marginal costs of the good and services c. Thinking about average benefits and average costs of the goods and services

b. Thinking about marginal benefits and marginal costs of the good and services

Why is it so difficult to consider costs that we have not physically paid as part of the cost of the decision? a. Because they are not actually costs b. Because they will only be costs once they are paid c. Because we have not directly paid someone

c. Because we have not directly paid someone

Which of the following is not an opportunity cost of attending college? a. Tuition paid b. Amount that one could have earned instead of going to college c. Food d. Books purchased at college

c. Food

Is room and board part of the cost of the decision to go to college? a. Yes b. No c. Part of room and board may be part of the cost

c. Part of room and board may be part of the cost

If a good or service is scare, which of the following is true? a. There is a shortage at the going market price b. Buyers cannot afford to purchase the product c. We must give something up if we want more of the good d. It is difficult to find the product in stores e. Production is very rare

c. We must give something up if we want more of the good

Is the income you could earn after going to college part of the cost of going to college? a. A portion is b. Yes c. No

c. No

Your college purchased a building east of campus for $500,000. Given changes in the city's real estate market, the current market value of the building is now $2 million. The total value of the use of the building for the college is estimated to be $1.5 million. What should your college do? Explain why. a. Not use the building. It would be a loss of $2 million. b. Use the building. The gain would be $1.5 million. c. Not use the building. Using the building would mean loosing $.5 in doing so. d. Use the building. They only paid $500,000. It's value is $1.5 million. They gain $1 million.

c. Not use the building. Using the building would mean loosing $.5 in doing so.

In every economy, resources are limited, but wants are large and increasing. What is this condition called? a. The opportunity cost of resources b. The opportunity cost of wants c. Scarcity d. Marginal cost

c. Scarcity

Tickets to a sold-out basketball game originally cost $50 each and cannot be returned. I bought one and now scalpers are willing to pay $125 for the ticket. The cost that should be considered if I am doing whether or not to go to the game is a. 0 b. $50 c. $75 d. $125 e. $175

d. $125

Is the money you could have earned instead of going to college, part of the cost of going to college? a. Yes b. No c. A portion of it is

d. Yes