MICRO CH1

Question 1

Scarcity

Answer 1

The inability to satisfy all of our wants is the problems of scarcity.

Scarcity arises from limited time, money, and energy.

희소성(scarcity)이란 어떤 것을 원하는 사람들의 욕구를 모두 만족시킬 만큼 자원이 충분히 있지 않다는 것을 뜻한다.

Question 2

Economics

Answer 2

How individuals, businesses, and governments make the best possible choices to get what they want, and how those choices interact in markets.

Question 3

Opportunity cost

Answer 3

The cost of the next best alternative given up.

It can be money, time, or resources given up when one choice is made rather than another

Question 4

To make a smart choice

Answer 4

Because of scarcity, every choice involves a trade off. To get something, you must give up something else.

To make a smart choice, the value of what you get must be greater than the value of what you give up.

Question 5

Incentives

Answer 5

Rewards and penalties for choices.

Anything that motivates a person to do something

Common types of incentives
Tax Incentives
Financial Incentives
Subsidies

Question 6

Voluntary trade

Answer 6

Simple economic answer: instead of self-sufficiency, specialization and trading makes us better off.

Any time two people make a voluntary trade, each person feels that what they get is of greater value than what they give up.

If there weren’t mutual benefits, the trades won’t happen.

Why? differing opportunity costs of producing.

NOT absolute advantage, but COMPARATIVE advantage groups have over one another makes the trade beneficiary for both parties.

Question 7

Production Possibilities Frontier

Answer 7

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

Simply put, maximum combinations of products or services that can be produced with existing inputs.

Question 8

Absolute advantage

Answer 8

The ability to produce a product or service at a lower absolute cost than another producer.

Question 9

Comparative advantage

Answer 9

The ability to produce a product or service at a lower opportunity cost than another producer.

Question 10

Calculating Opportunity cost

Answer 10

Give up / Get.

Opportunity cost of producing wood and bread

“Give up x amount of wood to get y amount of bread.”

Take the maximum amount of production capability for each variable in this example wood and bread, and use the formula.

Question 11

Economic models

Answer 11

The map that economists use. A simplified representation of the real world, focusing attention on what’s important for understanding a specific idea or concept.

Economic models which assume all other things not in the model as constant, are the mental equivalent of controlled experiments in a laboratory.

A good economic model helps you make smart choices, or helps you better understand the observed facts of the economic world around you. If the model helps you understand and predict, it’s a good model.

Question 12

Positive statements

Answer 12

About “what is”, about things that can be checked.

Can be evaluated as true or false by checking the facts.

ex) “Toronto is closer to Vancouver than to St. John’s, Newfoundland”

“Government-provided healthcare increases public expenditures.”

This statement is fact-based and has no value judgment attached to it. Its validity can be proven (or disproven) by studying healthcare spending where governments provide healthcare.

Question 13

Normative Statements

Answer 13

Involves Judgements or opinions, things that cannot be factually checked.

About what you believe “should be”.

“Women should be provided higher school loans than men,” “Laborers should receive greater parts of capitalist profits,” and “Working citizens should not pay for hospital care.” Normative economic statements typically contain keywords such as “should” and “ought.”

Question 14

Distinction between positive statements and normative statements will help you make smart choices. How?

Answer 14

To make smart choices in life, you first have to decide your goals. What do you value? Should you spend your life getting rich or help others?” These are normative questions.

Once you choose your goals, thinking like an economist and using economic models and positive statements will help you effectively achieve them, and get you to where you want to go.

Question 15

Micro economics

Answer 15

“Mikros: small in Greek”.

Analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets.

Individual choices, the “TREES in a Forest”

Question 16

Macro economics

Answer 16

“Makros: large in Greek”

Analyzes performance of the whole nation’s economy and the global economy. It’s the combined outcomes of all individual microeconomic choices.

Question 17

Three keys to smart choices

Answer 17

1. Choose only when ADDITIONAL benefits are greater than ADDITIONAL OPPORTUNITY COSTS.
2. Count only ADDITIONAL benefits and ADDITIONAL OPPORTUNITY COSTS.
3. Be sure to count ALL ADDITIONAL benefits and costs, including IMPLICIT COSTS and EXTERNALITIES.

Question 18

Opportunity cost rule

Answer 18

1. Choose only when ADDITIONAL/Marginal benefits are greater than ADDITIONAL/Marginal OPPORTUNITY COSTS.
   ex) Decision to go to college

additional benefits: higher lifetime income, more reputation, better education etc.

additional costs: the money you will spend on tuition and books, your time and income you give up by not working that time etc.

MARGINAL AND ADDITIONAL means the SAME THING.

Question 19

Look forward only to additional (marginal) benefits and additional (marginal) opportunity costs

Answer 19

If you decide to study for the next hour, the tuition you already paid is irrelevant.

You cannot get back the tuition you ALREADY paid whether you choose to study or not.

When deciding, DO NOT LOOK BACK, ONLY LOOK FORWARD. Your previous decisions or the money you’ve already spent are history and cannot be undone.

Question 20

Implicit Costs

Answer 20

The opportunity costs of investing your own money or time.

Examples of implicit costs include the loss of interest income on funds and the depreciation of machinery for a capital project. They may also be intangible costs that are not easily accounted for, including when an owner allocates time toward the maintenance of a company, rather than using those hours elsewhere.

Question 21

Negative Externalities

Answer 21

The costs that affects others who are external to the choice or trade in a negative way.

i.e) Driving. you drive a car, you pay for car payments, insurance, repairs, licence fees, tolls and parking. BUT you don’t necessarily pay for the pollution you are emitting.

negative externality exists when the production or consumption of a product results in a cost to a third party. Air and noise pollution are commonly cited examples of negative externalities.

Question 22

Positive Externalities

Answer 22

Benefits that affect others who are external to a choice or a trade.

For example, education directly benefits the individual and also provides benefits to society as a whole through the provision of more informed and productive citizens.

Private markets will underproduce in the presence of such positive externalities because the costs of production for the firm are overstated and the profits are understated.