Economics I Chapter 1

Good
Anything from which individuals receive utility or satisfaction.
Utility
The satisfaction one receives from a good.
Bad
Anything from which individuals receive disutility o dissatisfaction.
Disutility
The dissatisfaction one receives from a bad.
Land
All natural resources, such as minerals, forests, water, and unimproved land.
Labor
The physical and mental talents people contribute to the production process.
Capital
Produced goods that can be used as inputs for further production, such as factories, machinery, tools, computers, and buildings.
Entrepreneurship
The talent that some people have for organizing the resources of land, labor, and capital to produce goods, seek new business opportunities, and develop new ways of doing things.
Scarcity
The condition in which our wants are greater than the limited resources available to satisfy those wants.
Economics
The science of scarcity; the science of how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants.
Rationing Device
A means for deciding who gets what of available resources and goods.
True or false? Scarcity is the condition of finite resources. Explain your answer.
True. Scarcity means that wants exceed resources needed to satisfy those wants. Therefore, scaricity would be a condition of finite resources.
How does competition arise out of scarcity?
Competition arises out of scarcity because there are not enough resources to satisfy unlimited wants, so people have to compete for the finite resources that are available.
Also, whatever the rationing device is (money for example) people will compete for it.
How does choice arise out of scarcity?
Scarcity forces people to make choices. Since resources are not infinite, people have to prioritize and make choices about what is most important.
What are 4 categories of resources?
land, labor, capital, and entrepreneurship
Opportunity Cost
The most highly valued opportunity or alternative forfeited when a choice is made.
Why doesn’t zero cost mean zero price?
Even if someone gives you tickets to Yankees game for free so the price was zero, the cost is not zero. This is becuase the tickets force you to make a choice between attending the game or doing somethign else. The cost of the tickets would be the opportunity cost of attending.
Marginal Benefits
Additional beneitfs; the benefits con- nected with consuming an additional unit of a good or undertaking one more unit of an activity.
Marginal Costs
Additional costs; the costs connected with consuming an additional unit of a good or undertaking one more unit of an activity.
When is it more efficient to devote more resources to an endeavor?
When MB>MC
When is it more efficient to devote fewer resources to an endeavor?
When MC>MB
Decisions at the margin
Decision making characterized by weighing the additional (marginal) benefits of a change against the addi- tional (marginal) costs of a change with respect to current conditions.
Efficiency
Exists when marginal benefits equal marginal costs.
At what point is an economy producing the right amount or the most efficient amount of a certain good?
When MB=MC
Incentive
Something that encourages or motivates a person to undertake an action.
Exchange (Trade)
The giving up of one thing for something else.
Give an example to illustrate how a change in opportunity cost can affect behavior.
If you have chosen to rent a movie instead of going to the movies, a reduction in the price of movie theatre tickets could cause you change your behavior and choose to go to movies instead.
Studying has both costs and benefits. If you continue to study (say, for a test) as long as the marginal benefits of studying are greater than the marginal costs and stop studying when
the two are equal, will your action be consistent with having maximized the net benefits of studying? Explain your answer.
Yes, once the MC>MB you are no longer receiving more benefits from studying than it is costing you. So, for example, you might be better of getting more sleep than continuing to study.
You stay up an additional hour to study for a test. The intended effect is to raise your test grade. What might be an unintended effect of staying up another hour to study?
The unintended effect could be that you are so tired from staying up that you end up doing worse on the tests due to exhaustion
Ceteris Paribus
A Latin term meaning “all other things constant” or “nothing else changes.
Theory
An abstract representation of the real world designed with the intent to better understand it.
Abstract
The process (used in building a theory) of focusing on a limited number of variables to explain or predict an event.
What is the purpose of building a theory?
A theory allows economists to to explain and predict real-world events
How might a theory of the economy differ from a description of it?
A theory would focus on limited variables within the eocnomy and a description would include all the variables.
Why is it important to test a theory? Why not simply accept a theory if it sounds right?
A theory is by nature an abstraction and may not work in the real world so it has to be tested.
You economics professor says that, “if the price to go to the movies goes down, people will go to the movies more often.” A student in class says, “Not if the quality of the movies goes down.” Who is right, the economics instructor or the student?
It depends. The economics professor would be right in his idea if he had said, “Cteris Paribus” or all things equal. Since he did not say that, the student is also correct that if the quality goes down with the price then more people may not see movies.
Positive Economics
The study of “what is” in economics
Normative Economics
The study of “what should be” in economics.
Microeconomics
The branch of economics that deals with human behavior and choices as they relate to relatively small units: an individual, a firm, an industry, a single market.
Macroeconomics
The branch of economics that deals with human behavior and choices as they relate to highly aggregate markets (e.g., the goods and services market) or the entire economy.”
Unintended Effects
Economists often think in terms of causes and effects. Effects may be both intended and unintended. Economists want to denote both types of effects when speaking of effects in general.
Everytime a person makes a choice, he or se incurs an _____________________.
opportunity cost
The higher the opportunity cost of doing something is, the less likely/more likely it will be done.”
less likely
Land includes
natural resources,such as minerals, forests, water, and unimproved land.
Labor refers to the
physical and mental talents that people contribute to the production process.
Capital consists of
produced goods that can be used as inputs for further production, such as machinery, tools, computers, trucks, buildings, and factories.
Entrepreneurship refers to the
talent that some people have for organizing the resources of land, labor, and capital to produce goods, seek new business opportunities, and develop new ways of doing things.
What is the 3 step process to solve economic problems and issues?
(1)The problem is identified, and then it is defined or described. (2) Next, the causes of the problem are identified. (3) Finally, proposed solutions to the problem are put forth
Why do economists build theories?
to explain and predict real-world events
The United States is considered a rich country because Americans can choose from an abundance of goods and services. How can there be scarcity in a land of abundance?
Even a country with vast resources or a billionaire still face scarcity because all the money in the world does not provide infinite resources.
Give two examples for each of the following: (a) an intangible good, (b) a tangible good, (c) a bad.
a) happiness
b) a car
c) an illness
Give an example of something that is a good for one person and a bad for someone else.
Smoking could be a good for a person that enjoys it and a bad for the person breathing their second hand smoke
What is the difference between the resource labor and the resource entrepreneurship?
Labor is the the physical and mental talents people possess and bring to a job. Entrepreneurship is the talent that some people have for organizing the other resources (land, labor, and capital) to produce goods, seek new business opportunities, and develop new ways of doing things.
Can either scarcity or one of the effects of scarcity be found in a car dealership? Explain your answer.
Yes, if a particular car model is difficult to find and thus in short supply, consumers would have to look at alternative vehicles.
Explain the link between scarcity and each of the following: (a) choice, (b) opportunity cost, (c) the need for a rationing device, (d) competition.
a) Scarcity forces people to make choices between finite resources.
b) When scarcity forces people to make choices, opportunity costs are created based on what someone gives up in order to make that choice.
c) Scarcity also brings out the need for a rationing device becuase whatever the rationing device is (money for example) people will compete for it.
d) Competition arises out of scarcity because there are not enough resources to satisfy unlimited wants, so people have to compete for the finite resources that are available.
Is it possible for a person to incur an opportunity cost without spending any money? Explain.
Yes, even if someone gives you free tickets to a concert, the choice you make to attend incurs an opportunity cost of what you give up doing.
Discuss the opportunity costs of attending college for four years.
The opportunity cost of attending college would be whatever you give up doing in order to attend. For example, working a full time job and the salary earned would be the opportunity cost of attending college.
Explain the relationship between changes in opportunity cost and changes in behavior.
As opportunity costs change, people reevaluate the choices they have made. They may change their choices based on the new situation.
Smith says that we should eliminate all pollution in the world. Jones disagrees. Who is more likely to be an economist, Smith or Jones? Explain your answer.
Jones is more likely the economist because Smith’s statement would be more of a normative statement and Jones a positive statement.
“A friend pays for your lunch. Is this an example of a free lunch? Why or why not?
No, there is no such thing as a free lunch. Even that lunch that your friend paid for has a cost. That cost was what you could have been doing instead of eating lunch at that time.
A layperson says that a proposed government project simply costs too much and therefore shouldn’t be undertaken. How might an economist’s evaluation be different?
An economist would also evaluate the cost of not doing the project (the opportunity cost) to determine if it were worthwhile or not.
Economists say that individuals make decisions at the margin. What does this mean?
Decisions are made based on marginal costs and marginal benefits. When MB=MC that is the decision that needs to be made.
How would an economist define the efficient amount of time spent playing tennis?
Up to the point where the benefit of practicing is greater than or equal to the cost of practicing.
Ivan stops studying before the point at which his marginal benefits of studying equal his marginal costs. Is Ivan forfeiting any net benefits? Explain your answer.
Yes, the optimum point to stop studying is where MB=MC. If Ivan stops before this point he is given up some of the benefits of additional study.
What does an economist mean if she says there are no $10 bills on the sidewalk?
Someone might walk by and leave a penny on the sidewalk; however, there aren’t any $10 bills on the sidewalk because no one is going to pass up a $10 bill….the MC>MB of doing that.
A change in X will lead to a change in Y. The predicted change is desirable; so we should change X. Do you agree or disagree? Explain.
My answer is it depends. The change in Y may be desirable, but was the inital change in x desirable and are there any unintended effects or other costs to the change?
Why do people enter into exchanges?
In order to get something they really want or need.
When two individuals enter into an exchange, you can be sure that one person benefits and the other person loses. Do you agree or disagree with this statement? Explain
I disagree. No one would willingly enter into a trade where they were the loser. Everyone’s perception of what is a good and what is a bad for example is different. Therefore, while one person may think they are the only one benefitting from an exchange, the other person sees some benefit from the trade as well.
Would there be a need for a rationing device if scarcity did not
exist? Explain your answer.
No, scarcity bring about competition and the need for a rationing device.
Jackie’s alarm clock buzzes. She reaches over to the small table next to her bed and turns it off. As she pulls the covers back up, Jackie thinks about her 8:30 American history class. Should she go to the class today or sleep a little longer? She worked late last night and really hasn’t had enough sleep. Besides, she’s fairly sure her professor will be discussing a subject she already knows well. Maybe it would be okay to miss class today. Is Jackie more likely to miss some classes than she is to miss other classes? What determines which classes Jackie will attend and which classes she won’t?
Jackie is weighing the opportunity costs of missing her history class. Since she is so tired and thinks her professor will cover a topic she already understands,she would be more likely to miss this class than a class she is struggling in and does not understand. The opportunity costs of attending class or missing class will determine which ones Jackie attends.
If you found $10 bills on the sidewalk regularly, we might conclude that individuals don’t try to maximize net benefits.
Do you agree or disagree with this statement. Explain your answer.
Yes, people would not be realizing the value of the $10 bill and that the MB of picking up the bill outweigh the marginal costs.
The person who smokes cigarettes cannot possibly be think-ing in terms of costs and benefits because it has been proven that cigarette smoking increases one’s chances of getting lung cancer. Do you agree or disagree with the part of the statement that reads “the person who smokes cigarettes cannot possibly be thinking in terms of costs and benefits”? Explain your answer.
Logic might make us think this statement is true. However, we also know that people have different perceptions of reality. Someone might night be educated on the effects of smoking or their parent might have smoked and lived to be 103 and so they don’t believe the statistics. Their perception would be that the pleasure or benefits of smoking outweighed the costs.
Janice decides to go out on a date with Kyle instead of Robert. Do you think Janice is using some kind of rationing device to decide whom she dates? If so, what might that rationing device be?
Without realizing it, she may well be. She is comparing the two men in her mind and might be using the amount of fun she thinks she wil have as the rationing device.
A theory is an abstraction from reality. What does this mean?”
Theories, out of necessity, are formed from abstracts or focusing on a limited number of variables to explain or predict an event. The real word cannot be limited so easily.
Inversely Related
Two variables are inversely related if they change in opposite ways.
Independent
Two variables are independent if, as one changes, the other does not.
Slope
The ratio of the change in the vari- able on the vertical axis to the change in the variable on the horizontal axis.
Gross Domestic Product
The value of the entire output produced annually within a country’s borders.
Bar Graph
Visual aid that is a useful way to represent relative relationships — that is they show not only a certain value (like GDP) for each year, but also of the relative relationship between the numbers for different years.
Line Graph
A visual aid useful for illustrating changes in a variable over a time period
An upward-sloping line (left to right) represents two variables that are _______ __________
directly related.
Two variables are _________ related if one variable rises as the other falls.
inversely
A downward-sloping line (left to right) represents two variables that are ________ _______
inversely related.
Two variables are ____________ if one variable rises as the other remains constant.
inependent
The slope of a line is the ratio of the change in ___________________________________
the value on the y axis (rise) over the change in the value on the x axis (run)
The slope of a straight line is the ______ between any two points on the line.
same
What type of relationship would you expect between the following?
a. Sales of hotdogs and sales of hotdog buns
b. The price of winter coats and sales of winter coats
c. The price of personal computers and the production of personal computers
d. Sales of toothbrushes and sales of cat food
e. The number of children in a family and the number of toys in a family
a. direct
b. inversely related
c. direct
d. independent
e. direct
How do you determine the slope of a curve at a point?
Draw a line tangent to the curve at the point and then determine the slope of the tangent line.
Any point on a 45-degree line is _________from the two axes.
equidistant
Pie chart
A visual aid that is a is a convenient way to represent the different parts of something that when added together equal the whole; it shows rough percentage breakdowns and relative relationships.