Midterm 1: Chapter 1 Flashcards
(24 cards)
What is economics?
The study of how to manage scarce resources
What is scarcity?
the limited nature of resources
What does it mean that people face trade-offs (principle #1)?
We have to give something up in order to get something else. This is due to scarcity.
What is opportunity cost (principle #2)?
the opportunity cost of an item is whatever must be given up to obtain it.
How do we decide what to pick in a trade-off?
look at the opportunity cost
Does everyone have the same opportunity cost?
NO, because everyone is giving up something different
Who has the highest opportunity cost?
Whoever has to give up the most
Who has the highest opportunity cost?
A. a promising young mathematician who will command a high salary once she earns her college degree
B. a student with avg. grades and has never had a job
C. a famous rich actor who wants to go to college
D. a student who is the best basketball player on college team, but isn’t good enough to play professional
C. because he is giving up a real job with a high salary to go to college
Example: You can stay home and study to do well on your exam or you can go to the movies with your friends, but not both. Does this example use scarcity, tradeoffs, both or neither.
Both
Do rational people think a the margin or not (principle #3)?
Yes
True or False: Rational people systemically and purposefully do the best they can to achieve their objectives.
True
How do rational people make decisions at the margin?
by evaluating costs and benefits of marginal changes (adjustments to an existing plan)
When do Rational people “take the action”?
Marginal Benefit (MB)>Marginal Cost (MC)
When do Rational people not “take the action”?
MB < MC
You are selling your 1996 Mustang. You have spent $1000 on repairs. Then the transmission dies. The repair will cost $600. The blue book value is $6500 w/ working transmission and $5700 w/o working transmission.
$800 if fixed= MB
$600 to fix = MC
MB>MC
fix it
You are selling your 1996 Mustang. You have spent $1000 on repairs. Then the transmission dies. The repair will cost $600. The blue book value is $6000 w/ working transmission and $5500 w/o working transmission.
$500 if fixed = MB
$600 to fix = MC
MB
Do people respond to incentives? (principle #4)
Yes
What is an incentive?
Something that induces a person to act (the prospect of a reward or punishment)
True or False: Rational people DON’T respond to incentives.
False. Rational people do respond to incentives
Example: When gas prices rise, do people buy more hybrid cars or more gas guzzling cars?
buy more hybrid cars
True or False: Trade can make everyone better off (principle #5).
True
Should people do everything or specialize in one thing?
Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods.
How can countries benefit from trade and specialization?
- get a better price abroad for goods they produce
- buy other goods cheaper than we could produce them for.
Example: Trade between countries tends to…
A. reduce specialization and can make everyone better off
B. reduce specialization and make everyone worse off
C. Raise specialization and can make everyone better off
D. Raise specialization but make everyone worse off
C.
