Topic 1- Ten Principles of Economics

Question 1

Economics

Answer 1

The study of consumer, business, and government choices to attain goals given scarce resources

Question 2

Scarcity

Answer 2

Unlimeted wants and lemited resources to fulfill those wants

Question 3

Why do we make choices?

Answer 3

Because of the bottom line: there are not enough resources available fro everyone to have everything

Question 4

Microeconomics

Answer 4

Examining the behaviours and decisions of an individual, a firm, or a market!

CONCERNS: -how they make choices -how they interact -how governments influence their choices

Question 5

Macroeconomics

Answer 5

Study of the eocnomy as a whole and the behaviour of the aggregate sectors such as consumers, producers, and government

GDP! Inflation, unemployment, the business cycle

Question 6

?????2008 financial crises

Question 7

Principle 1: People Face Tradeoffs

Answer 7

Making decisions is about comparing costs and benefits of choices, every choice has a tradeoff

Society has tradeoffs: spending money on army less on infrastructure

Question 8

Principle 1: Tradeoffs- WHAT IS SOCIETIES BIGGEST TRADEOFF?

Answer 8

EFFICIENCT AND EQUITY! efficiency: getting max benefits from resources

equity: resources benefits being distributed fairly among oscietys members

Question 9

example of efficiency vs equity

Answer 9

Progressive taxation (creates equity but forces tradeoff in efficiency bc rich wont work as much since it is taxed off)

Question 10

Principle 2: the cost of something is what you give up to get it

Answer 10

When you make a decision, you cnanot make another decision! You have used your scarce resources for the first decision already

Question 11

Principle 2- The cost of something- what is the biggest cost?

Answer 11

THE OPPORTUNITY COST! you give up the chance and think about what could have been done with waht was given up

The opporutnity cost is the value of the next best alternative, every time you make a decision (the implicit cost of decision mkaing)

Question 12

Principle 2- The 2 types of cost

Answer 12

Explicit cost- monetary expense
Implicit cost- Opportunity cost, what if the resources have been used in adifferent way

Question 13

Principle 3: rational people think at the margin

Answer 13

People make choices based on increading marginal benefit at the marginal cost!!!
MB>= MC!!

MB MUST BE GREATER THAN OR EQUAL TO COST OR WHY WOULD U DO THAT

Question 14

when do business operate at the margin

Answer 14

ALWAYS EVEN FOR A FRACTION OF A CENT!!

Question 15

PRINCIPLE 4: People respond to incentives

Answer 15

Incentive matter, the desire for personal gain is a potent motiavtion

Question 16

Principle 5: Trade can make everyone better off

Answer 16

Comparative afvantage: trading when you are specializing in one good can ebnefit everyone, bc they all the same!

Question 17

Principle 6: Markets are usually a good way to organize economic acitivty

Answer 17

• markets answer the three economic questions
• EITHER THE CONSUMERS, FIRMS, GOVT OR MORE THAN OEN DECIDES

Question 18

3 PRINCIPLE QUESTIONS OF EVERY MARKET

Answer 18

What is bein gproduced
HOW WILL THEY BE PROFUCED
WHO GETS WHAT IS PRODUCED

Question 19

What does every single choice come wit?

Answer 19

AN OPPORUTNITY COST!

Question 20

Answer ECON Q1: WHat good are being produced?

Answer 20

DETERMINED BY CONSUMERS FIRMS AND GOVERNEMTNS, EVERY CHOICE HAS AN OPP COST

Question 21

Econ q2: how will the goods be produced?

Answer 21

-more workers or more machinery? (LABOUR INTENSIVE OR CAPITAL INTENSIVE)
-where produced? outsourced?

Question 22

Who will recieve the goods and services produced?

Answer 22

Largely depends on how income is distributed
-Is there redistribution?

Question 23

Market economy

Answer 23

-Laissez-Faire Adam SMith Capitalism!
-limited governemnt red tape and freedom of choices
-PRICES (personal responsibility, private property, rule of law, competition, self interest, economic freedom)

Question 24

market:

Answer 24

a group of buyers and sellers of a good/service as well as the rules of how they interact

Question 25

sOCIALISM

Answer 25

-kARL marx -Govt decides -equity

Question 26

Voluntary echvange

Answer 26

Both buyer and seller are made better off by transaction (MARKET ECONOMY PRINCIPLE)

Question 27

Voluntary echvange

Answer 27

Both buyer and seller are made better off by transaction (MARKET ECONOMY PRINCIPLE)

Question 28

Productive efficiency:

Answer 28

wHEN A GOOD OR SERVICE IS PRODUCED AT THE LOWEST POSSIBLE COST (MARKET ECONOMIES)

Question 29

Allocative Efficiency (ID O NOT UNDERSTAND)

Answer 29

-profuction is consistent with consumer preferences MARGINAL BENEFIT OF THE LAST UNIT OF PRODUCTION OF A GOOD OR SERVICE IS EQUAL TO MARIGNAL COST OF PRODUCING IT (MARKET PRINCIPLE)

Question 30

mIXED eCONOMY

Answer 30

eCNOMIC DECISION RESULT FROM THE INTERACTION OF BUYERS AND SELLERS INMARKEY

Question 31

Principle 7: governemnts can sometimes improve market outcomes

Answer 31

Roles: -Promoting efficiency (public policy can protect against market failure and promote efficiency) -promoting equity (govt may alter market outcomes to promote equity!!! tax welfare redistirbute)

Question 32

Market failure

Answer 32

when makret failsto allocate scarce resources efficeintly WHY? 1. EXTERNATILITIES: profuction/consumption of a good affects bystandesr (pollution) 2. Market power- single buyer.seller has substantial influence of market price (MONOPOLY)

Question 33

What determines Labour profuctivity

Answer 33

1. Physical Capital: stock of equipment/ structure to produce goods 2. Human capital: accumulated knowledge and skills of workers (education and training) 3. Natural resources: inputs into production of goods produced by nature (land rivers mineral deposits) 4. Tehc change: quanittiy of output a firm can profudece using quanitity of inputs Physical, Human, Technological and Natural Capital > Labour productivity >PPP

Question 34

Principle 8: a countrys standard of living depends on its ability to produce goods and services

Answer 34

Rich countries are rich because there are more PRODUCTIVE (Assessed by the GDP AND PPP) Labour productivity is the quanitty of goods and services profuced in ohe hour/one wokrer= determines the Standard of living in nation

Question 35

What determines the standard of living/ppp of a country?

Answer 35

THE LABOUR PRODUCTIVITY: quanitiyiy of goods and services that can be produce by 1 worker/1 hour

Question 36

Principle 9: Prices rise when the govt prints too much money

Answer 36

THIS IS INFLATION (2 types) 1. Demand Pull: increasing demand for goods > govt print more moeny 2. Cost Push: increasing cost of production, firms raise their prices > govt prints more money

Question 37

What does central bank printing more money di?

Answer 37

SHORT RUN: Monetary expansion leads to increasing output and decreasing interest rate as more money circulates, but leads to increase price level bc money has less value LONG RUN: all prices permanentaly increased, no effect on output/interest rate

Question 38

Principle 10: society faces a short run tradeoff between inflation and umenployment

Answer 38

During expansion: Total production, emplyment, incomes are increasing= low unemplyment bc JOBS ARE BEING CREATED Demand for goods increase, prices increase= high inflation During recession: Total production emplyment and income are decreasing= high unemplyment Demand for goods decease, spending decreases, prices decrease= deflation

Question 39

2 biggest soceital tradeoffs

Answer 39

EFFICIENCY VS EQUITY INFLATION AND UNEMPLOYMENT

Question 40

What are three causes of inflation

Answer 40

DEMAND PULL COST PUSH EXCESS MONAY

Question 41

3 CATEGORIES for 10 principles of econ: The principles of decision making The principles of interactions among people The principles of economy as a whole

Answer 41

1. People Face Tradeoffs 2. The cost of a good is what you give up to get it 3. Incentives Work 4. Rational people think at the margin 5. Trade can make everyone better off 6. Markets are usually good way to organize economic activity 7. govts can sometimes improve market outcomes 8.The standard of living in a country is determined by the productivity 9. Short run trade off between inflaiton and unemployment 10. Prices rise when govt prints too much MONAY

Question 42

Why is marginal benefit of water low while marginal ebenfit of diamiond is high?

Answer 42

The marginal benefit, in turn, depends on how many units a person already has. Water is essential but the marginal benefit of an extra cup is small because water is plentiful

Question 43

Efficiency vs Equity in terms of pie

Answer 43

Efficiency changes size of pie (bigger vs smaller) Equity refers to how many pieces pie is cut into