Chapter 1

market economy

"Free Enterprise System" which is unplanned and determined by the supply and demand of goods and services

Which of the following describes the equity-efficiency trade-off?

Actions intended to make economic outcomes fairer can cause efficiency to decrease.

future cost

An estimated quantification of the amount of a prospective expenditure

You have a part time job that pays $8 per hour. Your manager has asked you to work 4 extra hours on Friday night, but you already have plans for dinner and a movie with a friend on Friday night. Under what conditions will you choose to work on Friday night? Consider the economic way of thinking in answering this question; also assume that you are rational (even if you do not think you are rational) and can afford dinner and a movie.

You value the extra pay more than the Friday night activities (in terms of marginal benefits, marginal costs, and your utility).

implicit cost

a cost that does not require the outlay of money; measured by the value ($) of forgone (given up) benefits

sunk cost

a cost that has already been incurred and is not recoverable

explicit cost

a cost that that requires an outlay of money

a recession

a downturn in the economy

the invisible hand

a phrase used to refer to the way an individual's pursuit of self-interest can lead, without the individual intending it, to good results for society as a whole

What is the primary difference between accounting profit and economic profit?

accounting profits ignore implicit costs; economic profits consider them

equilibrium

an economic situation where no individual would be better off doing something different

incentive

anything that offers rewards to people who change their behavior

macroeconomics

branch of economics concerned with the overall ups and downs in the economy. study of economics and behavior of national or international economics as a whole

microeconomics

branch of economics that studies how people make decisions and how those decisions interact. study of economic behavior of individual consumers, firms, or markets

Which word best identifies the fundamentals of economics?

choice

Which of the following decisions is least likely to be well-explained by marginal analysis?

deciding which college to attend

increasing marginal cost

each additional unit costs more to produce than the previous one

constant marginal cost

each additional unit costs the same to produce as the previous one

decreasing marginal benefit

each additional unit of an activity yields less benefit than the previous unit

equity

fairness; (everyone's view on fairness is different so equity is not as well defined as the concept of efficiency)

In a market-oriented economy, individual's economic lives are said to be...

interrelated with many other individuals and firms.

What are common resources?

labor, human capital, machinery, land

Megan has a one hour gap in her course load for the fall semester. There are two courses available for her to take at that time: reading piano sheet music and beginning rock climbing. She does not have any experience with piano or rock climbing. In the end, she decides to enroll in the rock climbing course, despite her fear of heights. Identify which of the following exhibits a potential trade-off with enrolling in rock climbing:

learning to read piano sheet music

command economy

organized by the government officials who also own and direct the factors of production

Britannia was a thriving empire in its golden age. Business was booming and they were the center of international trade under the leadership of Emporer Raphael III. His empire\'s pride and joy was the trading of green and black tea and decreed to have their entire economy built around it. However, in the mid 1800\'s, Britannia experienced a severe economic downturn when the other nations of the world created an embargo on tea from Britannia, which led to civil strife due to thousands of workers being laid off. A downward fluctuation in the economy like this is known as.... The correct term from above is known as...

recession macroeconomics

resource scarcity

resources are insufficient (limited, constraining) to meet all goals or wants

accounting profit

revenue (money you get back) minus explicit cost (outlay of $) (ignore implicit costs)

economic profit

revenue (money you get back) minus the opportunity cost of resources used; usually less than the accounting profit (consider implicit costs)

There are limited resources to satisfy all of society's wants. This is....

scarcity

marginal analysis

study of marginal decisions; considering both marginal benefits and marginal cost when making decisions

efficient

taking all opportunities to make some people better off without making other people worse off

marginal benefit

the additional benefit derived from producing one more unit of a good or service

marginal cost

the additional cost incurred by producing one or more unit of a good or service

market failure

the failure of a market to be efficient

Daniel has decided to open his own bakery using locally sourced ingredients and supplies. He provides income and jobs to local suppliers. He also provides his community with a place to buy delicious baked goods. This is an example of:

the invisible hand

optimal quantity

the quantity that generates the highest possible total net gain

opportunity cost

the real cost of an item; the dollar value of the best alternative that we give up when we make a choice or decision (non cash or implicit costs)

specialization

the situation when each person specializes in the task that he or she is good at performing

You have to give up one thing to consume another. You compare the benefits and costs of engaging in an activity.

tradeoffs