Chapter 1: Principles Of Economics

Question 1

What does Economy means in the Greek word?

Answer 1

“One who manages a household”

Question 2

What is Economics?

Answer 2

The study of the choices, people, firms, and government make when resources are scarce.

Question 3

What is a trade-off?

Answer 3

Doing one thing and not doing the other

Question 4

What are the two main branches of economics?

Answer 4

Microeconomics and macroeconomics. Microeconomics analyzes choices made by individual participants in an economy, while micro economics analyzes the overall performance of an economy.

Question 5

What does scarcity mean?

Answer 5

It means the society has limited resources, and therefore cannot produce all the goods and services people wish to have

Question 6

Principle #1: People face trade offs

Answer 6

To get one thing, we usually have to give up another thing which means trading off one goal against another.

Question 7

What is Efficiency?

Answer 7

This means society gets the most that it can from its scarce resources

Question 8

What is equity?

Answer 8

This means the benefits of those resources are distributed fairly among the members of society

Question 9

Principal #2: The cost of something is wha you give up to get it

Answer 9

Decisions require comparing cost and benefits of alternatives

Question 10

Opportunity cost

Answer 10

Opportunity cost of an item is what you give it to obtain the item

Question 11

Principal #3: rational people think at the margin

Answer 11

Marginal changes are small, incremental adjustments to an existing plan of action. People make decisions by comparing costume benefit at the margin.

Question 12

Marginal Benefit

Answer 12

The value placed on an extra (one more) unit of an item

Question 13

Marginal cost

Answer 13

The value of the sacrifice made to obtain an additional unit of an item

Question 14

Rational behavior

Answer 14

This occurs when individuals seek net games by undertaking actions for which marginal benefit exceeds marginal cost.

When marginal benefit exceeds marginal cost of an activity or rational person will undertake more of that activity

Question 15

Decisions involve wing marginal benefit against marginal cost:

Answer 15

If the marginal benefit is greater than the marginal cost, it means go for it however, if the marginal cost is greater than the marginal benefit, it means avoid it

Question 16

Principal #4: people respond to incentive

Answer 16

Something that induces a person to act

Marginal changes in costs and benefit motivate people to respond.

Question 17

Principle #5: Trade can make everyone better off

Answer 17

People gain from their ability to trade with one another and competition results in gains from trading.

Trade allows people to specialize in what they do best

Question 18

Principle #6: Markets are usually a good way to organize economic activity

Answer 18

Households decide what to buy and who to work for and firms decide who to hire and what to produce

Question 19

Market economy

Answer 19

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Question 20

Principle #6: Governments can sometimes improve market outcomes

Answer 20

Market failure occurs when the market fails to allocate resources efficiently

When the market fails (breaks down) government can intervene to promote efficiency and equity

Question 21

Market failure may be caused by

Answer 21

An externality which is the impact of one personal or firms actions on the well-being of a bystander

Market power, which is the ability of a single person or firm to unduly influence market prices

Question 22

Principal #8: The standard of living depends on a country’s production

Answer 22

Almost all variation in living standards are explained by differences in countries productivities.

Productivity is the amount of goods and services produced from each hour of a workers time

Question 23

Standard of living may be measured in different ways:

Answer 23

By comparing personal incomes and by comparing the total market value of a nations production

Question 24

Principle #9: prices rise in the government in Prince too much money

Answer 24

Inflation is an increase in the overall level of prices in the economy, and one cause of inflation is the quantity of money.

Creating large quantities of money makes its value fall

Question 25

Principle #10: Society faces a short-run trade off between inflation and unemployment

Answer 25

The Phillips curve illustrates the trade-off between inflation and unemployment, which is the higher, the inflation, the lower the unemployment