ECON 1000 Chapter Notes - Chapter 1: Opportunity Cost, Invisible Hand, Market Failure

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ECON 1000

Chapter 1: Ten Principles of Economics

The ord eoo oes fro the Greek ord for oe ho aages a household.

Households and economies have much in common.

A household faces many decisions. It must decide which members of the household do which

tasks and what each member gets in return. In short, the household must allocate its scarce

resoures aog its arious eets, takig ito aout eah eer’s ailities, efforts, ad

desires.

Like a household, a society faces many decisions. It must allocate different people to different

jobs. It must also allocate the output of goods and services that they produce.

Scarcity means that society has limited resources and therefore cannot produce all the goods

and services people wish to have.

Economics is the study of how society manages its scarce resources. In most societies,

resources are allocated not by a single central planner, but htrough the combined actions of

millions of households and firms. Economist study how people make decisions: how much they

work, what they buy, how much they save, and how they invest their savings. They also study

how people interact with one another. Finally, economists analyze forces and trends that affect

the economy as a whole, including the growth in average income, the fraction of the population

that cannot find work, and the rate at which prices are rising.

Principle #1: People Face Tradeoffs

To get one thing that we like, we must often give up another thing that we like. For example, if

we sped oe o aatio, that oe that’s ot put ito retireet saigs. Oe lassi

tradeoff is etee gus ad utter. The ore soiet speds o atioal defee ad

security to protect its shores from foreign aggressors, the less it can spend on consumer goods

(butter) to raise the standard of living at home. Also important in modern society is the tradeoff

between a clean environment and a high level of income. Another tradeoff society faces is

between efficiency and equity. Efficiency means that society is getting the maximum benefits

from its scarce resources. Equity means that the benefits of those resources are distributed

fairl aog soiet’s eers. When government policies are desgined, these goals often

conflict. For example, the different tax brackets, while this increases equity, it causes a lost in

terms of efficiency. When the government redistributes income from the rich to the poor, it

reduces the reward for working hard; as a result, people work less, and produce fewer goods

and services.

Efficiency:

Production: uses the lowest cost to make the most output given the technology that they have.

Consumption: absence of waste, goods are being consumed by those that value it the highest.

This is very subjective?!

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

Consider the decision of whether to go to college or university. The bonuses are enrichment

and a lifetime of better job opportunities. But what are the costs? Might be tempted to add up

the money spent on tuition, books, room and board. Yet this total does not truly represent

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Document Summary

The (cid:449)ord e(cid:272)o(cid:374)o(cid:373)(cid:455) (cid:272)o(cid:373)es fro(cid:373) the greek (cid:449)ord for (cid:862)o(cid:374)e (cid:449)ho (cid:373)a(cid:374)ages a household(cid:863). It must decide which members of the household do which tasks and what each member gets in return. In short, the household must allocate its scarce resour(cid:272)es a(cid:373)o(cid:374)g its (cid:448)arious (cid:373)e(cid:373)(cid:271)ets, taki(cid:374)g i(cid:374)to a(cid:272)(cid:272)ou(cid:374)t ea(cid:272)h (cid:373)e(cid:373)(cid:271)er"s a(cid:271)ilities, efforts, a(cid:374)d desires. Like a household, a society faces many decisions. It must allocate different people to different jobs. It must also allocate the output of goods and services that they produce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner, but htrough the combined actions of millions of households and firms. Economist study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings.

Related Questions

1. The cost-benefit approach to deciding whether or not to undertake any activity argues that you should engage in the activity if:
a. The marginal cost of the activity exceeds the marginal benefit of the activity.
b. The marginal benefit of the activity exceeds the marginal cost of the activity.
c. There are benefits associated with the activity
d. There are costs associated with the activity

2. In the circular flow model, the household sector:
a. Demand goods and services in output markets, while the business sector supplies them.
b. Supplies goods and services in output markets, while the business sector demands them.
c. Demands and supplies goods and services in output markets.
d. Neither demands nor supplies goods and services in output markets.

3. In resource markets, households operate on the ________ side and business firms operate on the ______ side; these activities represent ______for households and _______ for business firms.
a. Demand; supply; income; revenue
b. Demand; supply; expenditures; revenue
c. Supply; demand; expenditures; costs
d. Supply; demand; income; costs

4. Ice cream sales and the incidence of polio were strongly correlated prior to the development of the polio vaccine. Assuming that eating ice cream caused polio is an example of the:
a. Fallacy of composition
b. Fallacy of division
c. Fallacy of false cause
d. Fallacy of ceteris paribus

5. Assuming that everyone is better off when a bridge is built in Alaska to serve a small community is an example of the:
a. Fallacy of composition
b. Fallacy of division
c. Fallacy of false cause
d. Fallacy of ceteris paribus

6. A production possibilities frontier for two outputs is drawn assuming that:
a. Opportunity cost is fixed, but the quantity and quality of resources changes
b. Both outputs use the same quantity of each resource, but the technology differs
c. The amount of resources currently available for production is fixed
d. The technology available can only be applied to producing one of the outputs

7. When wants and needs exceed the resource available to satisfy them:
a. Scarcity exists and society must rely on the government to allocate resources.
b. Scarcity exists and society must rely on free markets to allocate resources.
c. Scarcity exists and decisions must be made about how to allocate limited resources among competing uses.
d. Scarcity does not exist so it is not necessary to allocate resources.

8. If Carl is able to produce a greater number of baskets per hour than Sheila, then:
a. Carl cannot have a comparative advantage in the production of baskets
b. Carl has an absolute advantage in the production of baskets
c. Sheila has an absolute advantage in the production of baskets
d. Sheila has a comparative advantage in the production of baskets

9. If Carl's opportunity cost per basket is 4 bowls, but Sheila's opportunity cost per basket is 3 bowls, then:
a. Carl has a comparative advantage in the production of baskets
b. Carl has an absolute advantage in the production of baskets
c. Sheila has an absolute advantage in the production of baskets
d. Sheila has a comparative advantage in the production of baskets

10. Which of the following is not an example of the factor of production or economic resource referred to as capital?
a. An office building
b. Computers used by a tax preparation business
c. Lawnmowers owned by a landscaping firm
d. Money used to start a new business.

lavenderhippopotamus513

1/ All the problems studied in economics arise from

a. the unequal distribution of income

b. the scarcity of resources

c. inappropriate government action

d. overpopulation

e. war

2/ The overall performance of the economic system as a whole is the focus of

a. macroeconomics

b. public economics

c. international finance

d. labor economics

e. microeconomics

3/ After graduating from high school, Steve had the following three choices for his immediate future, listed in order of preference: (1) attend our campus, (2) work in a printed circuit board factory, or (3) attend a rival college. His opportunity cost of going to college here includes which of the following?

a. The income he could have earned at the printed circuit board factory plus the direct cost of attending college here (tuition, textbooks, etc.)

b. The benefits he could have received from going to the rival college.

c. Only the tuition and fees paid for taking classes here.

d. Cannot be determined from the information given.

e. The cost of books and supplies at the rival college.

4/ The question of scarce resources and unlimited wants are addressed in

a. psychology

b. history

c. anthropology

d. political science

e. economics

5/ Consider an economic model designed to analyze the purchasing decisions of households. An assumption that a household chooses between only two goods would be an example of an

a. positive assumption

b. simplifying assumption

c. macroeconomic assumption

d. financial assumption

e. critical assumption

6/ Which of the following explains why economists may disagree over normative issues?

a. They have different beliefs and values.

b. They often employ different statistical techniques when examining data.

c. Some work only on microeconomic issues, while others focus exclusively on macroeconomic issues.

d. They examine the same data to draw their conclusions.

e. They need to disagree to publish their research findings.

7/ Suppose your friends take you out for dinner on your birthday, and you have a much better time than you would have had to do anything else. There is still an opportunity cost, even though they will not let you pay for anything. True/False

8/ Microeconomics

a. addresses scarcity from a global perspective

b. is purely theoretical and has little value in explaining real-world phenomena

c. focuses on what is happening in the economy as a whole

d. examines how individuals, households, and firms make economic decisions

e. answers the fundamental economic questions of how, when, where, and why.

9/ People and organizations have to make choices about how to allocate time and money because

a. religious values conflict with economics

b. time and money are both scarce

c. government require it

d. there are unlimited resources

e. corporations control our lives

10/ The objective of an economic model is to

a. yield a better understanding of important relationships

b. use simplifying assumptions to make positive economic statements

c. be an accurate description of reality

d. predict real-world occurrences with complete accuracy

e. use basic principles of economics to derive fundamental assumptions about human behavior.

jaderaven304

21. The English word that comes from the Greek word for "one who manages a household" is

A- market
B- consumer
C- producer
D- economy

Question 22. 22. For a college student who wishes to calculate the true costs of going to college, the costs of room and board

A- should be counted in full, regardless of the costs of eating and sleeping elsewhere.
B- should be counted only to the extent that they are more expensive at college than elsewhere.
C- usually exceed the opportunity cost of going to college.
D- plus the cost of tuition, equals the opportunity cost of going to college.

Question 23. 23. The phenomenon of scarcity stems from the fact that

A- most economies' production methods are not very good.
B- in most economies, wealthy people consume disproportionate quantities of goods and services.
C- governments restrict the production of too many goods and services.
D- resources are limited.

Question 24. 24. Central planning refers to

A- markets guiding economic activity. Today many countries that had this system have abandoned it.
B- markets guiding economic activity. Today many countries that did not have this system have implemented it.
C- government guiding economic activity. Today many countries that had this system have abandoned it.
D- government guiding economic activity. Today many countries that did not have this system have implemented it.

Question 25. 25. Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator Johnson argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that

A- we should agree with Senator Brown.
B- we should agree with Senator Johnson.
C- a good decision requires that we recognize both viewpoints.
D- there are no tradeoffs between equity and efficiency.

Question 26. 26. Max and Maddy charge people to park on their lawn while attending a nearby craft fair. At the current price of $10, seven people park on their lawn. If they raise the price to $15, they know that only five people will want to park on their lawn. Whether they have seven or five cars parked on their lawn does not affect their costs. From this information, it follows that

A- they should leave the price at $10.
B- it does not matter if they charge $10 or $15.
C- they would do better charging $15 than $10.
D- they should raise the price even more.

Question 27. 27. A circular flow diagram is a model that

A- helps to explain how participants in the economy interact with one another.
B- helps to explain how the economy is organized.
C- incorporates all aspects of the real economy.
D- Both (a) and (b) are correct.

Question 28. 28. In the markets for goods and services in the circular-flow diagram,

A- households provide firms with savings for investment.
B- households provide firms with labor, land, and capital.
C- firms provide households with output.
D- firms provide households with profit.

Question 29. 29. Incomes of U.S. households in the 1970s and 1980s

A- grew rapidly, due to the widespread success of labor unions in pushing up wages during those decades.
B- grew rapidly, due to several increases in the minimum wage during those decades.
C- grew rapidly, due to government policies that discouraged the importation of foreign products during those decades.
D- grew slowly, due to the slow growth of the output of goods and services per hour of U.S. workers' time during those decades.

Question 30. 30. For economists, statements about the world are of two types:

A- assumptions and theories.
B- true statements and false statements.
C- specific statements and general statements.
D- positive statements and normative statements.

marooncat628

ECON 1000 Chapter Notes - Chapter 1: Opportunity Cost, Invisible Hand, Market Failure

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