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Micrecon Chap1
Chapter 1, Ten Principles of Economics
| Question | Answer |
|---|---|
| What is the law of diminishing returns? | As additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. |
| What is scarcity? | the limited nature of society’s resources. |
| What is economics? | The study of how society manages its scarce resources. |
| Why do scarcity and economics go hand in hand? | Society has limited resources and therefore cannot produce all the goods and services people wish to have. |
| What do economists study? | How people makes decisions, how people interact with each other, and how trends and forces affect an economy as a whole. |
| What does economy (oikonomos) mean? | One who manages a household. |
| What are decisions that people have to consider in an economy? | Trade-offs of resources, the cost of something you want, the margin, and incentives. |
| How do people interact in an economy? | Trades (and a potential to make everyone better), markets that organize economic activity, and governments interactions with economies. |
| What affects how economies work as a whole? | Countries' standard of living and resources that are available, prices inflating due to printing money, and the balance between unemployment and inflation. |
| Explain Principle 1 of the Ten Principles of Economics. | People have to make decisions and to make those decisions they face trade-offs. These trade-offs stem from the fact that nothing is free, decisions, trade-offs (individually and society), efficiency, equality (and the tradeoff between them). |
| Explain Principle 2 of the Ten Principles of Economics. | The cost of something is what you give up to get it. There are opportunity costs to trade-off. |
| Explain Principle 3 of the Ten Principles of Economics. | Rational people think at the margin, comparing marginal benefits and marginal costs and only take action if the marginal benefits > marginal costs, the person's willingness to pay for a good. |
| What are rational people? | Systematically and purposefully do the best they can to achieve their objectives given the available opportunities. |
| Marginal changes? | Small incremental adjustments to a plan of action. |
| Explain Principle 4 of the Ten Principles of Economics. | Some incentives are higher prices and public policy. Ex (Seat belt law alters a diver's cost-benefit calculation-Sam Peltzman, 1975) |
| What are incentives? | Something that induces a person to act. |
| How does higher prices influence people. | Buyers consume less, and sellers produce more. |
| How do public policies influence people. | Changes costs or benefits, changes people's behaviors, and can have unintended consequences. |
| Explain Principle 5 of the Ten Principles of Economics. | Trade can make everyone better off. One person may give up a scarce resource but gain something they seem valuable in return and the same can be said for everyone involved. |
| What is Trade? | Allows each person to specialize in the activities he or she does best and enjoy a greater variety of goods and services. |
| Explain Principle 6 of the Ten Principles of Economics. | Different government types control economies differently. Adam Smith's "invisible hand" |
| Explain Adam Smith's "invisible hand." | households and firms interact in markets and act as if they are guided towards desirable market outcomes. |
| What is Corollary? | Government intervention which prevents invisible hand from guiding actors in economies markets |
| How does a communist country influence how people interact in an economy? | Central planning; government officials are in the best position to allocate the economy's scarce resources. They control goods and services produced, how much it is produced, and who produces and consumes these goods and services. |
| How does a market economy influence how people interact in an economy? | Resources are allocated through decentralized decisions of many firms and households, are guided by prices and self-interests, no one is looking out for the economic well-being of society as a whole. |
| Explain Principle 7 of the Ten Principles of Economics. | Governments can sometimes improve market outcomes, we need governments to enforce rules and maintain institutions by enforce property rights, promote efficiency and equality. They promote property rights, prevent market failure, manage externalities... |
| Explain Principle 8 of the Ten Principles of Economics. | A country's standard of living depends on its ability to produce goods and services. There are large differences in living standards and differences of productivity. |
| What is productivity? | Quantity of goods and services produced from each unit of labor input. |
| Explain Principle 9 of the Ten Principles of Economics? | Prices rise when the government prints too much money. Causes large or persistent inflation. |
| Explain Principle 10 of the Ten Principles of Economics? | Society faces a short-run trade-off between inflation and unemployment. Over a period of a year or two policies push inflation and unemployment in opposite directions and analyze business cycles (fluctuations in economic activity). |
| Explain short-run effects of monetary injections. | Stimulates overall level of spending and the demands of goods and services, causing firms to raise prices, hire more workers, produce more goods and services, and lower unemployment. |
Created by:
angry
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