1.2 Econ Quiz

Rational choice is a choice that uses the available resources to _____ of the person making the choice.

Rational choice is a choice that uses the available resources to *best achieve the objective* of the person making the choice.

Opportunity cost of attending a ball game:

The things you would have bought with what you spent on the ticket and bus fare getting to the game plus the things you'd alternatively have done with your time.

Natural experiments

a situation that arises in the ordinary course of economic life which the one factor of interest is different and other things are equal

We make rational choices by comparing...

costs and benefits

A choice on the margin is a choice that is made by comparing all the relevant _____ systematically and _____.

A choice on the margin is a choice that is made by comparing all the relevant *alternatives* systematically and *incrementally*.

A economic model is a description of some features of the economic world that includes _____ features assumed necessary to explain the _____ facts.

A economic model is a description of some features of the economic world that includes *only those* features assumed necessary to explain the *observed* facts.

Example of an incentive

All conference volunteers would be offered free lunch on all three days

Example of natural experiments

Canada has higher unemployment benefits than the United States, but the people in the two nations are similar. So to study the effect of unemployment benefits on the unemployment rate, economists might compare the US with Canada.

Example of statistical investigation

Cigarette smoking and lung cancer are correlated. Sometimes a correlations shows a causal influence of one variable on the other. Smoking does cause lung cancer. But sometimes the direction of causation is hard to determine.

Positive statements

disagreements that can be settled by facts; statements about what *is*; can be tested

Normative statements

disagreements that can't be settled by facts; statements about what *ought* to be; cannot be tested

Benefit of something is the...

gain or pleasure it brings

Notes

https://docs.google.com/document/d/1a2fgZdKYFyfQvfoK_eL7xf4EhlNIC_Ccjrg_hloR6R8/edit

The benefits of being in school...

include the present enjoyment of student life and a higher future income

Correlation

is the tendency for the values of two variables to move together in a predictable and related way

The task of economic science...

is to discover positive statements that are consistent with that we observe and that help us to understand that economic world (???)

Statistical investigation

looks for a correlation

Economists try to understand and...

predict the effects of economic forces by using the scientific method

Economic experiment

puts people in a decision-making situation and varies the influence of one factor at a time to discover how they respond

You make a rational choice when you...

take those actions for which marginal benefit exceeds or equals marginal cost.

Opportunity cost

the best thing that you *must* give up to get something - the highest valued alternative forgone

Benefit

the gain or pleasure that something brings

Marginal cost

the opportunity cost of a one-unit increase in an activity

A scientist's second step is...

to build a model that provides a possible answer to the question of interest

A scientist's third step is...

to check the proposed model against the facts

The costs of being in school for a full-time student include...

tuition, books, other study costs, and forgone earnings

What is benefit measured by?

what you are willing to give up

Marginal benefit

what you gain when you get one more unit of something

How did he answer his question?

- He answered his questions by emphasizing the role of the division of labor and free markets. - Example of a pin factory. One person, using hand tools in the 1770s, might make 20 pins a day. Yet, he observed, by using those same hand tools but breaking the process into a number of individually small operations in which people specialize -- by the division of labor -- ten people could make a staggering 48,000 pins a day. One factory employing ten workers would need to sell more than 15 million pins a year to stay in business. - Smith saw free competitive markets as another source of wealth. The self interested pursuit of profit, led by an invisible hand, resulted in resources being used in ways that created the greatest possible value and wealth.

Is schools always best?

- The costs are incurred now, but the benefits accrue over a working lifetime. For most, the net benefit is big. - Bill Gates quit Harvard; Mick Jagger quit the London School of Economics; Clayton Kershaw turned down a scholarship at Texas A&M. - All three expected the benefit from school to be less than the opportunity cost of being in school.

Six ideas define the economic way of thinking:

1. A choice is a tradeoff 2. Cost is what you must give up to get something 3. Benefit is what you gain from something 4. People make rational choices by comparing benefits and costs 5. Most choices are "how much" choices made at the margin 6. Choices respond to incentives

Because we face scarcity we must make _____ . To make a _____ we select from _____.

Because we face scarcity we must make *choices*. To make a *choice* we select from *alternatives*. Whatever choice you make, you could have chosen something else.

incentive

a reward or a penalty - a "carrot" or a "stick" - that encourages or discourages an action

Government economic policy

How can California balance its budget? Should the federal government cut taxes or raise them? These questions all for decisions that involve the evaluation of a marginal benefit and a marginal cost and an investigation of the interactions of individuals and businesses. Governments can make better decisions.

Example of a tradeoff

I will study for my exam instead of going to the movie

3. Was Kate's decision to play the third hour of tennis rational?

If marginal benefit exceeded marginal cost, Kate's decision was rational.

4. Did Kate make her decision on the margin?

Kate made her decision on the margin because she compared the benefit and cost of one more hour (marginal benefit and marginal cost).

Every week, Kate plays tennis for two hours, and her grade on each math test is 70%. Last week, after playing for two hours, Kate considered playing another hour. She decided to play another hour and cut her study time by one hour. But last week, her math grade fell to 60%. 1. What was Kate's opportunity cost of the third hour of tennis?

Kate's opportunity cost of the third hour of tennis as the drop in her grade of ten percentage points.

Who was Adam Smith?

Lured from his professorships (at 28) by a wealthy Scottish duke who gave him a pension of 300 a year - ten times the average income at that time. He devoted ten years to writing his masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776.

Marginal benefit is the _____ that arises from one unit _____ in an activity.

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

Marginal cost is the ______ that arises from one unit _____ in an activity.

Marginal cost is the *opportunity cost* that arises from one unit *increase* in an activity.

Business economic policy

Should Texaco get more oil and gas from the Gulf of Mexico or from Alaska? Should Sony make only flat panel televisions and stop making conventional ones? These questions involve the evaluation of a marginal benefit and a marginal cost. Some of the questions require a broader investigation of the interactions of individuals and business. By approaching these questions with the tools of economics and by hiring economics as advisers, businesses can make better decisions.

Personal economic policy

Should you take out a student loan? Should you get a weekend job? These questions involve marginal benefit and a marginal cost. Although some of the numbers might be hard to pin down, you will make more solid decisions if you approach these questions with the tools of economics.

3. What would be the marginal benefit from a cruise? What would be the marginal cost of a cruise?

The marginal benefit from a cruise is the most you are willing to pay or one. The marginal cost is what you would have to pay to take a cruise.

2. Given that Kate played the third hour, what can you conclude about her marginal benefit and marginal cost of the second hour of tennis?

The marginal benefit from the second hour of tennis must have exceeded the marginal cost of the second hour because Kate chose to play the third hour.

The marginal benefit of something is measured by _____ to get _____.

The marginal benefit of something is measured by what you are willing to give up to get one additional unit of it.

The marginal cost of something is what _____ to get _____.

The marginal cost of something is what you must give up to get one additional unit of it.

What did he want to know?

Why are some nations wealthy while others are poor?

4. Why would you expect a lower price to increase the number of people who decide to take a cruise?

With a lower price, more people will have a marginal benefit that exceeds the price and they will choose to take a cruise

The New York Times reports that cruise lines have been slashing prices and cruise sales are up. It says this surge of interest tells us that despite the uncertain economic climate, people clearly need more fun in their lives and view their vacations as a valuable and necessary part of it. 1. In deciding whether to take a cruise, would you face a tradeoff?

You would face a tradeoff because you would have to forgo something else that you might otherwise do with your resources - time and budget.

2. How would you make a rational choice about taking a cruise?

You would make a rational choice by comparing the marginal benefit from a cruise and the marginal cost of taking one.

A choice made at the margin is...

a choice made by comparing ALL the relevant alternatives systematically and incrementally.

Rational choice

a choice that uses the available resources to best achieve the objective of the person making the choice

Scientific method

a common sense way of systematically checking what works and what doesn't work

Economic model

a description of some feature of the economic world that includes only those features assumed necessary to explain the observed facts

A scientist (economist) begins with...

a question or a puzzle about cause and effect arising from some observed facts

Tradeoff

an exchange; giving up one things to get something else