Lecture Notes

Question 1

Why do we enter into agreements/trade?

Answer 1

The expected marginal benefit was greater than the expected marginal cost.

Question 2

What does trade create? How?

Answer 2

Wealth out of thin air - by rearranging the pattern to a higher order.

Question 3

What does scarcity imply?

Answer 3

COMPETITION.

Question 4

What do good decisions require?

Answer 4

Good information.

Question 5

Is economics moral or amoral?

Answer 5

Amoral

• doesn’t try to distinguish between good and bad
• morality comes from the institutional framework in society
• we set the framework!

Question 6

What is wealth?

Answer 6

It is subjective. Depends on what each individual person values.

Question 7

What is the rationality assumption?

Answer 7

As a rule, people don’t deliberately harm themselves. On average, people are rational.

Question 8

What is normal profit?

Answer 8

The return necessary to attract and maintain entrepreneurial participation in some economic activity.

Question 9

What is pure profit/economic rent?

Answer 9

Any return greater than normal profit.

Question 10

What are transaction costs?

Answer 10

The cost of a transaction.

• e.g. to withdraw money from an ATM, have to pay a fee.
• can be more than monetary value, e.g. your time.

Question 11

What are the factors of production and their returns?

Answer 11

1. Land - Rent
2. Labor - Wages
3. Capital - Interest
4. Entrepreneurial Capacity - Profit

Question 12

What is an entrepreneur’s job?

Answer 12

1. Organizing the factors of production

2. Assuming risk

Question 13

What three questions do we have to ask in an economic system?

Answer 13

1. What to produce?
2. How to produce that which is produced?
3. How to distribute that which is produced?

Question 14

What must we do to be profitable?

Answer 14

Produce something that consumers want and do so efficiently.

Question 15

Labor-intensive production function

Answer 15

Using lots of labor when wages are low

Question 16

Capital-intensive production function

Answer 16

Using less labor to be more efficient

Question 17

Horizontal-production function

Answer 17

Grow horizontally - land is less expensive.

Question 18

Vertical-production function

Answer 18

Minimize use of land - grow vertically - land is more expensive.

Question 19

What is a positive sum game?

Answer 19

Everyone wins - e.g. markets.

Question 20

What is a zero sum game?

Answer 20

One party wins, one party loses - e.g. poker.

Question 21

What is a negative sum game?

Answer 21

Introducing something that makes everyone less wealthy.

Question 22

What does capitalism punish?

Answer 22

Bad decisions.

Question 23

What are the five foundations of economics?

Answer 23

1. Incentives
2. Trade-offs
3. Opportunity cost
4. Marginal thinking
5. Trade creates value

Question 24

Weltenschauung:

Answer 24

Worldview

-a comprehensive conception or apprehension of the world especially from a specific standpoint

Question 25

What are the four postulates of behavior?

Answer 25

1. People have preferences
2. More of a good is preferred to less of a good.
3. Substitution - there are substitutes for everything (sometimes imperfect)
4. Diminishing marginal returns

Question 26

Does free trade have transaction costs?

Answer 26

No

Question 27

Portfolio Theory

Answer 27

Decisions about how we hold our wealth.

• can be material things
• not necessarily monetary
• different people hold wealth differently

Question 28

MAD

Answer 28

Mutually Assured Destruction

• why we haven’t had a nuclear war
• we build up our stockpile and acquire enough to: sustain first strike and retaliate against enemy.