Chapter 1 - Principles that Underline Individual Choice: The core of economics

Question 1

What is individual choice?

Answer 1

Individual choice is the decision by an individual of what to do, which necessarily involves a decision of what not to do.

Question 2

What do all economic activities involve?

Answer 2

They all involve individual choice.

Question 3

List the principles of individual choice.

Answer 3

The Principles of Individual Choice:

1. People must make choices because resources are scarce.
2. The opportunity cost of an item—what you must give up in order to get it—is its true cost.
3. “How much” decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less.
4. People usually respond to incentives, exploiting opportunities to make themselves better off.

Question 4

Principle #1: Choices Are Necessary Because Resources Are Scarce

Answer 4

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Question 5

What is a resource?

Answer 5

A resource is anything that can be used to produce something else.

Question 6

What does it mean to say “Resources are scarce”?

Answer 6

Resources are scarce—not enough of the resources are available to satisfy all the various ways a society wants to use them.

Question 7

List the types of scarce resources and give examples of each.

Answer 7

1. Natural resources - minerals, lumber, petroleum
2. Human resources - labour, skill, intelligence
3. Clean air
4. Water

Question 8

What does “scarcity of resources” mean?

Answer 8

The scarcity of resources means that society as a whole must make choices.

Question 9

Case study on cod fishing

Answer 9

For various reasons, there are some decisions that a society decides are best not left to individual choice. Take the case of cod fishing. By 1992, excessive fishing by individual fisherman had left the stocks of cod in the North Atlantic close to extinction. The Canadian government intervened to limit the amount harvested by fishermen; as a result, by 2016 cod stocks were on their way to recovery.

Question 10

Principle #2: The True Cost of Something Is Its Opportunity Cost

Answer 10

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Question 11

What is the opportunity cost of an item?

Answer 11

The opportunity cost of an item—what you must give up in order to get it—is its true cost.

Question 12

What are all costs?

Answer 12

All costs are opportunity costs.

Question 13

What is the opportunity cost of a choice?

Answer 13

The opportunity cost of a choice is what you forgo by not choosing your next best alternative.

Question 14

What is the relation of opportunity cost and money?

Answer 14

Sometimes the money you have to pay for something is a good indication of its opportunity cost. But many times it is not.

Question 15

Principle #3: “How Much” Is a Decision at the Margin

Answer 15

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Question 16

What is a trade-off?

Answer 16

It is a comparison of the costs and benefits of doing something.

Question 17

What does a decision involve?

Answer 17

A decision involves a trade-off—a comparison of costs and benefits.

Question 18

What are marginal decisions?

Answer 18

They are decisions about whether to do a bit more or a bit less of an activity.

Question 19

What is marginal analysis?

Answer 19

It is the study of marginal decisions.

Question 20

Summary:

You make a trade-off when you compare the costs with the benefits of doing something.Decisions about whether to do a bit more or a bit less of an activity are marginal decisions. The study of such decisions is known as marginal analysis.

Answer 20

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Question 21

Principle #4: People Usually Respond to Incentives, Exploiting Opportunities to Make Themselves Better Off

Answer 21

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Question 22

What is an incentive?

Answer 22

An incentive is anything that offers rewards to people to change their behaviour.

Question 23

What is the after effect of using incentives?

Answer 23

Individuals will continue to exploit these opportunities until they have been fully exhausted.

Question 24

What is the basis of all predictions by economists about individual behaviour?

Answer 24

The principle that people will exploit opportunities to make themselves better off is the basis of all predictions by economists about individual behaviour. Economists tend to be skeptical of any attempt to change behaviour that doesn’t change incentives.

Question 25

Give an example of using incentives to break the cycle of poverty.

Answer 25

The Brazilian antipoverty program Bolsa Familia (Family Grant) has significantly improved their quality of life. The program currently reaches over 12 million Brazilian families, with the poorest families receiving around US$35 monthly per child, and moderately poor families receiving US$13 to US$15 monthly per child. Bolsa Familia wasn’t designed to just make everyday life more bearable for poor families; rather, it was primarily intended to break the cycle of poverty that keeps the poor trapped generation after generation. To motivate families to undertake those investments, researchers employed incentives—making rewards conditional on results. Bolsa Familia is an example of what is generally known as a conditional cash transfer program or CCT: families are given cash stipends conditional on achieving various benchmarks such as having their children vaccinated, taking them for annual health checkups, and maintaining satisfactory school attendance. CCT programs have proved that the poor do indeed respond to well-designed incentives and that there is hope for breaking poverty’s grip.

Question 26

One fact about China is indisputable: it has lots of people. Explain what steps the government took to avoid further exponential increase in the country's demographics and its after effects.

Answer 26

Trends in Chinese demographics have shifted over time the cost of having a child; in particular, the cost of having a boy or a girl. Concerned that it would be unable to adequately provide and care for such a large number of people, the Chinese government introduced the one-child policy in 1978. By 2016 the average number of children per Chinese woman had fallen to 1.6, from more than 5 in the 1970s. The effect of the one-child policy was to greatly increase the perceived cost to a Chinese family of a female child. As a result, while some were given up for adoption abroad, many Chinese females simply “disappeared” during the first year of life, victims of neglect and mistreatment. In fact, in 1990, Nobel Prize-winning Indian-born economist Amartya Sen calculated that there were 100 million “missing women” in Asia due to the perceived higher cost of female children, with estimates rising to 160 million. There are now estimated to be over 30 million excess men in China—the number of men in excess of the number of women who will reach adulthood by 2020.

Question 27

Quick Review

Answer 27

All economic activities involve individual choice. People must make choices because resources are scarce. The real cost of something is its opportunity cost—what you must give up to get it. All costs are opportunity costs. Monetary costs are sometimes a good indicator of opportunity costs, but not always. Many choices involve not whether to do something but how much of it to do. “How much” choices call for making a trade-off at the margin. The study of marginal decisions is known as marginal analysis. Because people usually exploit opportunities to make themselves better off, incentives can change people’s behaviour.

Question 28

Explain how each of the following illustrates one of the four principles of individual choice. a. You are on your third trip to a restaurant’s all-you-can-eat dessert buffet and are feeling very full. Although it would cost you no additional money, you forgo a slice of coconut cream pie but have a slice of chocolate cake. b. Even if there were more resources in the world, there would still be scarcity. c. Different teaching assistants teach several Economics 101 tutorials. Those taught by the teaching assistants with the best reputations fill up quickly, with spaces left unfilled in the ones taught by assistants with poor reputations. d. To decide how many hours per week to exercise, you compare the health benefits of one more hour of exercise to the effect on your grades of one fewer hour spent studying.

Answer 28

a. Second Principle - The opportunity cost of having the chocolate cake is having the coconut cream pie b. First principle (Need to check) c. Fourth Principle - The incentive that the class may be taught better due to the teaching assisstants' reputations is being exploited until it was exhausted as the spaces were filled quickly. d. Third Principle - A trade off is made while comparing these two.