The Ten Principles of Economics

Question 1

The management of society’s resources is
important because resources are ______

Answer 1

scarce

Question 2

simply means that society has limited
resources and therefore cannot produce all the
goods and services people wish to have

Answer 2

Scarcity

Question 3

is the study of how society
manages its scarce resources

Answer 3

Economics

Question 4

Ten Principles of Economics

Answer 4

1. People Face Trade offs
2. The Cost of Something is What you Give up to Get it
3. Rational People Think at the Margin
4. People Respond to Incentives
5. Trade Can Make Everyone Better Off
6. Markets are Usually a Good Way to Organize Economic Activity
7. Governments Can Sometimes Improve Market Outcomes
8. A country’s Standard of Living Depends on Its Ability to Produce Goods and Services
9. Prices Rise When the Government Prints Too Much Money
10. Society Faces a Short-Run Trade-Off between Inflation and Unemployment

Question 5

talk about individual decision making

Answer 5

(1-4)

Question 6

talk about how people
interact with one another

Answer 6

(5-7)

Question 7

talk about how the
economy as a whole works

Answer 7

( 8-10)

Question 8

Choice

Answer 8

Principle 1: People Face
Trade-Offs

Question 9

 This is due to scarcity of resources
 Resources are simply Finite

Answer 9

Principle 1: People Face
Trade-Offs

Question 10

 Because of this, making decisions requires
trading off one goal against another
 In Economics this is shown through the
Production Possibilities Frontier (PPF) Curve

Answer 10

Principle 1: People Face
Trade-Offs

Question 11

The property of society getting the
most it can from its scarce resources

Answer 11

Principle 1: People Face
Trade-Offs

Efficiency

Question 12

property of distributing economic
prosperity uniformly among the members of
society

Answer 12

Principle 1: People Face
Trade-Offs

Equality

Question 13

 Examples are a student choosing between
studying and going out or between studying one
subject or another, parents deciding on how to
spend family income and finally when people
are grouped into societies, guns vs butter
(defense spending vs consumer goods
spending), higher wages vs higher costs

 Last is the tradeoff between efficiency and
equality.
 This is because when the government redistributes
income from the rich to the poor, it reduces the
reward for being productive

Answer 13

Principle 1: People Face
Trade-Offs

Question 14

are limited resources

Answer 14

Manpower
Time
Timber

Question 15

How much is the cost?

Answer 15

Principle 2: The Cost of Something
is What You Give Up to Get It

Question 16

 This talks about the concept of
Opportunity Cost

Answer 16

Principle 2: The Cost of Something
is What You Give Up to Get It

Question 17

_______ simply means the
benefits that are lost when choosing one
option over another

Answer 17

Principle 2: The Cost of Something
is What You Give Up to Get It

Opportunity Cost

Question 18

 This is because people face trade offs,
they have to compare costs and benefits.
 Example would be a company sacrificing
operational costs of production for
research and development

Answer 18

Principle 2: The Cost of Something
is What You Give Up to Get It

Question 19

_________ concentrates on the cost of the thing you
gave up to get something in exchange

 An example would be spending the money
you have on alcohol instead of spending it
on food or other necessities

Answer 19

Principle 2: The Cost of Something
is What You Give Up to Get It

Concept of opportunity cost

Question 20

 This basically means that people maximize
available resources to achieve their goals
 There is an assumption in economics that
people are rational

Answer 20

Principle 3: Rational People
Think at the Margin

Question 21

 ____________, systematically and
purposefully do the best they can to achieve
their objectives, given the available
opportunities
 An example of this one is how firms maximize
profit and how households maximize their utility

Answer 21

Principle 3: Rational People
Think at the Margin

Rational people

Question 22

_________ use the term marginal change
to describe a small incremental
adjustment to an existing plan of action

 Keep in mind that margin means _____, so
marginal changes are adjustments around
the edges of what you are doing
 Rational people make decisions by
comparing marginal benefits and marginal
costs

Answer 22

Principle 3: Rational People
Think at the Margin

Economists
edge

Question 23

More concrete examples
 The decision between going for a streaming service,
like Netflix, HBO GO or Disney+ subscription and
renting movies in sites like YouTube.
 Netflix subscription costs at least 399 per month, this
means if you watch 3 movies a month, you might think
that your average cost per movie is 133 (399/3). This
means that you might be thinking that your marginal
cost in watching an extra movie is 133. but the reality is
that, your marginal cost is zero, since no matter how
many movies you watch, you still pay the same amount
 The only cost of watching a movie is the time it takes
away from other activities, such as working at a job or
reading and studying.
 This is the reason behind the success of streaming
service companies and why a lot of businesses are
trying to get into the business

Answer 23

Principle 3: Rational People
Think at the Margin

Question 24

 In the field of business, marginal decision making
has encouraged airlines to sell tickets to chance
passenger tickets.
 In the airline business even though people pay for
their tickets in advance, studies have shown that at
some point there are at least 1 or 2 people who
won’t appear for their flight.
 Since there are empty seats, the airline will not lose
any money by selling an additional ticket to chance
passengers.
 These tickets are then called overbooking tickets
 In the textbook, it tells us that the airline is willing to
sell these tickets for a lower price, but in reality, by
reason of demand, they sell it at a higher price

Answer 24

Principle 3: Rational People
Think at the Margin

Question 25

 This marginal decision making explains the reason behind the ________________  Water diamond paradox- aka the _____________

Answer 25

Principle 3: Rational People Think at the Margin water diamond paradox paradox value

Question 26

 although ______ is on the whole more useful, in terms of survival than diamonds, diamonds command a _________ in the market  This is due to the _____________ and diamonds are basically hard and takes effort to find

Answer 26

Principle 3: Rational People Think at the Margin water higher price abundance of water

Question 27

 ___________is something that induces a person to act, such as the prospect of a punishment or reward.  Because rational make decisions by comparing costs and benefits, they respond to incentives  Influence of prices on the behavior of consumers and producers is crucial to how a market economy allocates scarce resources

Answer 27

Principle 4: People Respond to Incentives Incentive

Question 28

 _______________ should never forget about incentives  ___________ are key to analyzing how markets work  Many policies change the costs or benefits that people face and as a result alter their behavior  A tax on gasoline for instance encourages people to drive smaller and more fuel efficient cars  This is why in Europe people drive smaller cars than in america

Answer 28

Principle 4: People Respond to Incentives Public policy makers Incentives

Question 29

power to regulate

Answer 29

Principle 4: People Respond to Incentives Police power

Question 30

 Examples would include the Sin Tax and the central bank’s act in raising interest rates during periods of inflation.  Most basic includes criminal laws to punish erring citizens  Policy makers must not forget this  In the Philippines, excessive unreasonable use of Police Power has stifled progress and kept few families in power. This is most evident in the transportation sector as congressional franchises would grant rights to operate bus companies, in return most members of congress own bus companies themselves.  The decision of the Supreme Court in Agri Biotech vs Green peace stopping production of GMOs has practically dis-incentivised research in food production

Answer 30

Principle 4: People Respond to Incentives

Question 31

 This is in accordance to the ___________ Proposed by economist ____________.  He posits that through comparative advantage economies can specialize in production of specific goods then get the other goods from other economies through trade

Answer 31

Principle 5: Trade Can Make Everyone Better Off Trade Theory David Ricardo

Question 32

 To Illustrate: Trade between China and the Philippines involving 2 goods; Steel and Microchips  Hours of work necessary to produce one unit Steel Microchips Philippines 8 (2/3 or 0.66) 12 (3/2 or 1.5 ) China 5 (5/3 or 1.66) 3 (3/5 or 0.6)

Answer 32

Principle 5: Trade Can Make Everyone Better Off

Question 33

 According to this table, china should just produce everything.  However according to the Ricardian Model, to make everyone better off The Philippines must produce steel while China will produce Microchips  This theory must however be adopted with extreme caution, because if this is all true every country should already belong to the first world.  What happens in the real world is that rich countries specialize in being rich while poor countries specialize in being poor

Answer 33

Principle 5: Trade Can Make Everyone Better Off

Question 34

 Through the Washington Consensus, western economies have forced third world countries to open their economies to the detriment of the latter’s industries.  China for example didn’t follow this as it raised tariffs to protect its industries  __________ can however work when all countries involved have developed their respective economies.  The example is the European Union. Each member state specializes in key sectors, German’s in car manufacture, Italy, Spain and Portugal in food processing etc…

Answer 34

Principle 5: Trade Can Make Everyone Better Off Comparative Advantage

Question 35

 In a market economy the decisions of a central planner are replaced by the decisions of millions of firms and households. _____ decide what to make and who to hire while households decide which firms to work for and what to buy with their incomes.  This is called the ___________of ____________  Adam Smith once said that it is not through the benevolence of the butcher, baker and brewer that we expect our dinner but from regard of their own self interest

Answer 35

Principle 6: Markets are Usually a Good Way to Facilitate Economic Activity Firms invisible hand theory Adam Smith

Question 36

 This is why the command economies of the Soviet Union and China at the time of Mao Ze Dong has failed  ____________ has destroyed their industries  In Soviet Union, resources were given from productive plants to the least productive ones, dis-incentivising productivity  In China, production quotas in the agricultural sector has lead to famines that killed millions of Chinese  _____________ is to adversely affect the allocation of resources

Answer 36

Principle 6: Markets are Usually a Good Way to Facilitate Economic Activity Collectivization Role of Taxation

Question 37

 ________________ will only function when the government enforces it’s rules and maintains institutions that are key to the economy.  With political stability comes investor confidence.  Some examples would include maintenance of property rights, patent and copyright laws

Answer 37

Principle 7: Governments Can Sometimes Improve Market Outcomes Adam Smith’s Invisible Hand

Question 38

 How The Asian Tigers developed their economies  Aside from tariffs, it provided home field advantages to local companies (Korea’s Chaebol and Japan’s Zaibatsu), because foreign companies were allowed to invest in them  China funded its industries through government backed loans and generous subsidies  All in all focusing on industrialization and exportation of manufactured goods

Answer 38

Principle 7: Governments Can Sometimes Improve Market Outcomes

Question 39

 Our country on the other hand is full of bad examples on how to not manage an economy  __________ as a justification for barriers to entry on key industries  Local firms don’t have anything to compete with, they are simply not incentivised to improve products or wages to its workers  Regulatory boards that are supposed to improve industries are hindrance to such progress  Inefficient Export Quotas To foreign companies

Answer 39

Principle 7: Governments Can Sometimes Improve Market Outcomes Police Power

Question 40

 ____________- a Situation in which a market left on its own fails to allocate resources efficiently  ______________- the impact of one person’s actions on the well-being of a by-stander  _____________- the ability of a single economic actor or small group of actors to have a substantial influence on market prices

Answer 40

Principle 7: Governments Can Sometimes Improve Market Outcomes Market Failure Externality Market Power

Question 41

 In macro economics, in the short run demand determines output  Firms produce goods in accordance to the demands of the household, this means that when demand is high firms will be able to produce more and hire more  This is why in the development of an economy, industrialization is key to development.  Productivity is the quantity of goods and services produced from each labor of input

Answer 41

Principle 8: A Country’s Standard of Living Depends on its Ability to produce Goods and Services

Question 42

 In nations where workers can produce a large quantity of goods and services per hour, most people enjoy a high standard of living; in nations where workers are less productive, most people endure a more meager existence.  Manufacturing industries and service hire more than agriculture and mining combined  This is why countries rich in natural resources are often left poor, while those with less have advanced economies  We call this in economics as the ____________

Answer 42

Principle 8: A Country’s Standard of Living Depends on its Ability to produce Goods and Services resource curse phenomenon

Question 43

Monetary Economics

Answer 43

Principle 9: Prices Rise When the Government Prints more Money

Question 44

 This activity causes ________  History has examples of this from the Weimar republic to Today’s Sri Lanka  Post pandemic economies have suffered inflation because of this  _________ is an increase in the overall level prices in the economy

Answer 44

Principle 9: Prices Rise When the Government Prints more Money inflation Inflation

Question 45

 As Firms Hire, people will have more money to spend  With this, people will be able to buy more goods and services  Assuming that supply remains constant, prices increase, causing inflation

Answer 45

Principle 10: Society Faces a Short run Trade Off between inflation and unemployment