Chapter 1: Economic Decisions

Question 1

Economics

Answer 1

is the discipline that studies how efficient decisions are made

Question 2

Efficient decisions

Answer 2

involve choosing the most valuable alternative

Question 3

theory of revealed preference

Answer 3

Based on the choices of a consumer a resulting choice reveals preference.

Question 4

characteristics of value

Answer 4

• Value depends on the situation
• Value is different for different people
• Subsequent units of the same good have less value

Question 5

optimal arrangement principle

Answer 5

The idea that we first choose the best, then the second best, and so on.

Question 6

value of something to an individual

Answer 6

the most that individual is willing to sacrifice to obtain that something. Or, if the individual owns that something, its value is the least the individual is willing to accept in exchange for that something.

Question 7

Cost

Answer 7

the value of the best alternative which is sacrificed when a decision is made.

Question 8

no free lunch principle

Answer 8

Since any decision has at least two alternatives, any decision involves costs.

Question 9

Macroeconomics

Answer 9

the study of entire economies, using concepts like total output, the unemployment rate, the national debt, total investment.

Question 10

scarcity

Answer 10

Having more wants than our resources can satisfy.

Question 11

Marginal Value

Answer 11

the value of the individual units of something in a group. In other words how much value is given to an item as more and more is consumed.

Question 12

marginal analysis

Answer 12

We consume each unit for which the marginal value is at least as great as marginal cost.

Question 13

Law of Diminishing Returns

Answer 13

As we add workers to a production facility, eventually they become less productive because there’s no way for everyone to take part in the production process.

Question 14

Demand

Answer 14

is the relationship between the possible prices of something and the quantities people are willing to buy, other things equal (same as marginal value curve)

Question 15

Supply

Answer 15

is the relationship between the possible prices of something and the quantities people/firms are willing and able to sell, other things equal (same as marginal cost concept)

Question 16

equilibrium price

Answer 16

consumers can buy all they want and, at the same time, firms can sell all they want.

Question 17

Social Gain =

Answer 17

Total Value - Total Cost or Marginal Value - Marginal Cost

Question 18

Consumer’s Gain =

Answer 18

Total Value - Total Amount Paid

Question 19

Producer’s Gain =

Answer 19

Total Amount Paid - Total Cost

Question 20

The Economic Problem

Answer 20

allocating scarce resources to their best uses

Question 21

Changes in supply

Answer 21

are shifts in the supply curve. That is, producers wish to produce more or less, even if the price does not change. They are caused by changes in the producer’s costs.

Question 22

Changes in demand

Answer 22

are shifts in the demand curve. That is, consumers wish to buy more or less, even if the price does not change. They are caused by changes in things that influences the consumer’s willingness to purchase the product which have nothing to do the product price.