CH 1: Principles of Econ

Question 1

Economics

Answer 1

The study of choices that individuals make given the presence of scarcity

Question 2

Scarcity

Answer 2

Limited resources but unlimited wants

Question 3

Scarcity vs. poverty

Answer 3

Poverty is comparing someone’s wealth to a subjective threshold value vs. how everyone faces limited resources

Question 4

The Six Types of Resources

Answer 4

Land, nonhuman animal resources, labor (physical & mental human capital), capital, technology, & entrepreneurial ability

Question 5

Capital

Answer 5

Resources, produced using land and labor, to use for further production

Question 6

Economy

Answer 6

The institutional structure through which individuals in a society coordinate their diverse wants

Question 7

The three questions economies must answer…

Answer 7

1) What should we produce and how much? 2) How will we produce? 3) for whom do we produce?

Question 8

Efficiency

Answer 8

The property of sciety getting the most out of its resources

Question 9

Rational People

Answer 9

Systemically and purposefully do the best they can to achieve their objectives (by weighing costs and benefits AND thinking at the margin)

Question 10

Sunk cost

Answer 10

Has already been incurred and cannot be recovered

Question 11

Economic decision rule

Answer 11

If the marginal (incremental/additional UNIT) benefit of the action exceeds the marginal (incremental) cost, do it. If the MC > MB, then don’t do it.

Question 12

Five facts about trade

Answer 12

1) NOT a zero sum game
2) Trade creates value for participants (b/c they wanted them most) and increases wealth by the society’s resources
3) Transaction costs can inhibit trade
4) The middleman reduces costs
5) As trade restrictions are lifted, more value is created from trade

Question 13

Market Economy

Answer 13

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

Question 14

The invisible hand

Answer 14

The price mechanism guiding economic forces to coordinate actions and allocate resources, influencing prices in a market context of buyers and sellers

Question 15

Adam Smith

Answer 15

Economist who coined “invisible hand”

Question 16

Invisible Handshake

Answer 16

Social and historical forces and cultural norms that influence market outcomes

Question 17

Invisible Foot

Answer 17

Political and legal forces in the market influencing market outcomes

Question 18

Private property rights

Answer 18

The ability of an individual to own and exercise control over scarce resources; exclusively held by the owner and protected against the invasion of others; transferred, sold, and mortgaged at the owner’s discretion

Question 19

What drives decision makers in a market economy?

Answer 19

Self interest

Question 20

Three duties of government in market economy:

Answer 20

1) Protect private property
2) Law enforcement and judicial system
3) Act as referee in market

Question 21

What signals a market economy to produce?

Answer 21

Customer sovereignty— producers move and create what customers are willing to purchase (also dictates the price they are willing to pay)

Question 22

How do those in a pure market economy produce?

Answer 22

Anything is fair game if producing profit; they are PRIVATE ENTERPRISES with the goal of maximizing profits

Question 23

For whom do those in a pure market economy produce?

Answer 23

An individual’s share of the economic pie based on inheritance, ability, & work effort (unequal distribution of wealth)

Question 24

What kind of budget do enterprises in a market economy have?

Answer 24

Hard constraint budgets (no government intervention if business fails)

Question 25

Command Economy

Answer 25

An economy in which production, investment, prices, and incomes are determined centrally by the government

Question 26

Three Key Assumptions of command economy

Answer 26

1) Communal resources ownership
2) Significant government intervention and control
3) Motivated by goodwill to community

Question 27

Market Failure

Answer 27

A situation in which a market, left on its own, fails to allocate resources effectively

Question 28

Three causes of market failure in which government intervenes to improve outcomes

Answer 28

1) Externalities
2) Asymmetric Information
3) Market Power

Question 29

Externalities

Answer 29

Impact of one’s actions on the wellbeing of another

Question 30

Asymmetric information

Answer 30

When there is information about a product (harmful or beneficial) that producers know but the consumer doesn’t (or vice versa)

Question 31

Market power

Answer 31

The ability of a single economic actor (or small group) to have substantial impact on market prices — monopoly

Question 32

A country’s standard of living depends on its ________

Answer 32

Productivity / ability to produce goods and services

Question 33

Productivity

Answer 33

The quantity of goods and services produced from each unit of labor input

Question 34

How much does a command economy produce?

Answer 34

What the government deems necessary

Question 35

How does a command economy produce?

Answer 35

The central planner determines what is produced since businesses are STATE OWNED ENTERPRISES

Question 36

What type of budget do commend economy enterprises have?

Answer 36

Soft constraint budget (govt assistance when needed)

Question 37

For whom do command economies produce?

Answer 37

All to have an equal share of the economic “pie”

Question 38

Nonhuman Animal Resources

Answer 38

Ex. Livestock

Question 39

Labor

Answer 39

Human capital (physical and mental)

Question 40

Capital

Answer 40

Tools owned by company for further production