MindTap Direct from text HW Chapter 1 – Flashcards

how society manages its scarce resources. is the study of how society manages its scarce resources. This includes studying how people make decisions and interact with one another, and the effects this has on the economy as a whole. See Section: Chapter 1 Introduction.

the total cash expenditure needed to go to the movie plus the value of your time. is what you give up to get that item. In this case, the opportunity cost of going to a movie includes both the total cash expenditure needed to go to the movie plus the value of the time you gave up in order to watch the movie. See Section: Principle 2: The Cost of Something Is What You Give Up To Get It.

incrementally alters an existing plan. to describe a small incremental adjustment to an existing plan of action. Recall that margin means "edge," so marginal changes are alterations around the edges of what you are doing. See Section: Principle 3: Rational People Think At the Margin.

the ability of free markets to reach desirable outcomes, despite the self-interest of market participants. In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith acknowledged that households and firms act as if they are guided by an "invisible hand" that leads to a desirable market outcome. Although participants in the market act with their own self-interest in mind (for example, households seek to maximize their happiness while firms seek to maximize profits), free markets can reach desirable outcomes without additional intervention under certain assumptions and market conditions. See Section: Principle 6: Markets Are Usually a Good Way to Organize Economic Activity.

d In addition, although the invisible hand can often guide market participants to a desirable market outcome, sometimes government intervention is necessary to correct for market failures. This term refers to a situation in which the market on its own will fail to produce an efficient allocation of resources. One example of a market failure is an externality; this occurs when one person's action inadvertently affects another person's well-being. Finally, the efficient outcome attained by the invisible hand doesn't necessarily result in equality among its participants. Depending on your political philosophy, this disparity in economic well-being may lead you to believe that government intervention is necessary. See Section: Principle 7: Governments Can Sometimes Improve Market Outcomes.

the central bank creating excessive amounts of money. The usual suspect in cases of large or persistent inflation is growth in the quantity of money. When a government's central bank creates large quantities of money, the value of that money falls, causing prices to rise and resulting in inflation. See Section: Principle 9: Prices Rise When the Government Prints Too Much Money.

Because the $5 million your company invested in a new product has already been spent, it should not be considered in the decision of whether to finish development, according to the principle of thinking at the margin. In this case, the additional cost to finish development is $1 million, whereas the expected additional benefit of the new product is $3 million in profit (assuming that the company receives zero profit if the product remains unfinished). Therefore, your company should go ahead and finish the product. In fact, your company should be willing to pay up to $3 million to finish development since that is the marginal benefit from doing so. See Section: Principle 3: Rational People Think at the Margin.

The provision of Social Security benefits lowers an individual's incentive to save for retirement because it provides income to retired individuals once they've reached age 65. This means that even if an individual hasn't been saving for retirement while working, he can still count on Social Security benefits to support himself through the retirement years. Moreover, because a person gets fewer after-tax Social Security benefits the greater his earnings are, there is also an incentive not to work (or not work as much) once he has hit the retirement age of 65. See Section: Principle 4: People Respond to Incentives.

If welfare benefits lasted forever, there would be little incentive to find work once unemployed. However, by only lasting for 2 years, there is a greater incentive for people to find work before the 2 years are up at which point they would receive no financial support from the government. This change in the government's antipoverty program reduces equality in the distribution of income, since those who cannot find a job will get no income at all; however, the economy is more efficient given the increased incentive for the unemployed to find work and contribute to the nation's output. See Section: Principle 4: People Respond to Incentives.