ECON 1001 Final Exam Review | Actual
study set | Questions and verified
Answers
Principle #1: People Face Tradeoffs - ANSW-All decisions involve tradeoffs
there is no free lunch
Efficiency - ANSW-using resources in such a way as to maximize the production of goods and services /
the total surplus received by all members of society
the size of the economic pie
Equity - ANSW-distributing fairly among members of the society
how the pie is divided into individual pieces
Principle #2: The cost of something is what you give up to get it - ANSW-making decisions requires
comparing the costs and benefits of alternative course of action, cost isn't always obvious
opportunity cost - ANSW-whatever you have to give up to get something else
an opportunity cost is an opportunity lost
Principle #3: Rational People Think at the Margin - ANSW-rational people do their best they can to
achieve their objectives given the opportunities they have
they want the best things
marginal changes - ANSW-small incremental adjustment to a plan of action
they ask what is the benefit
Principle #4: People Respond to Incentives - ANSW-Marginal changes in costs or benefits motivate
people to respond
Principle #5: Trade Can Make Everyone Better Off - ANSW-Rather than being self-sufficient, people can
specialize in producing one good or service and exchange it for other goods
Principle #6: Markets are usually a good way to organize economic activity - ANSW-in a market economy,
firms and households interact to jointly determine prices and quantity (supply and demand)
market economy - ANSW-Economic decisions are made by individuals or the open market.
firms decide: - ANSW-whom to hire and what to make
households decide: - ANSW-what firms to work for and what to buy with their incomes
Principle #7: Governments Can Sometimes Improve Market Outcomes - ANSW-
Market failure - ANSW-a situation in which a market left on its own fails to allocate resources efficiently
market doesn't respond
market power - ANSW-the ability of a single economic actor (or small group of actors) to have a
substantial influence on market prices
are dominant, you have no control
externality - ANSW-the impact of one person's actions on the well-being of a bystander (like pollution)
property rights - ANSW-the ability of an individual to own and exercise control over scarce resources
, Principle #8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services -
ANSW-differences in living standards among countries is attributable to productivity
productivity - ANSW-the quantity of goods and services produced from each unit of labor input
Principle #9: Prices Rise When the Government Prints Too Much Money - ANSW-too much money
chasing after too little goods (inflation)
inflation - ANSW-A general and progressive increase in prices
caused by the growth in the quantity of money
Principle #10: Society faces a short-run tradeoff between inflation and unemployment - ANSW-the
tradeoff can be observed in the analysis of the business cycle
low inflation high unemployment
business cycle - ANSW-Fluctuations in economic activity, such as employment and production
Microeconomics - ANSW-the study of how households and firms make decisions and how they interact
in markets
macroeconomics - ANSW-the study of economy-wide phenomena, including inflation, unemployment,
and economic growth
positive analysis - ANSW-analysis concerned with what is
minimum wage laws cause unemployment
normative analysis - ANSW-analysis concerned with what ought to be
the government should raise the minimum wage
absolute advantage - ANSW-the ability to produce a good using fewer inputs than another producer
comparative advantage - ANSW-the ability to produce a good at a lower opportunity cost than another
producer
perfect competition - ANSW-to reach this highest form of competition, a market must have the two
characteristics:
1. the goods offered for sale are all exactly the same
2. buyers and sellers are so numerous that no single buyer and seller has any influence over the market
price
price takers - ANSW-buyers and sellers must accept the price the market determines
Monopoly - ANSW-A market in which there are many buyers but only one seller.
produces where MC=MR
profit-maximizing output when P>MC
quantity demanded - ANSW-the amount of a good that buyers are willing and able to purchase
law of demand - ANSW-the quantity demanded of a good falls when price of the good rises
market demand - ANSW-the sum of all the individual demands for a particular good or service
normal good - ANSW-an increase in income leads to an increase in demand
inferior good (demand) - ANSW-an increase in income leads to a decrease in demand
price of related goods (demand) - ANSW-substitutes and complements
tastes (demand) - ANSW-consumer preferences; likes and dislikes in consumption; assumed to be
constant along a given demand curve
study set | Questions and verified
Answers
Principle #1: People Face Tradeoffs - ANSW-All decisions involve tradeoffs
there is no free lunch
Efficiency - ANSW-using resources in such a way as to maximize the production of goods and services /
the total surplus received by all members of society
the size of the economic pie
Equity - ANSW-distributing fairly among members of the society
how the pie is divided into individual pieces
Principle #2: The cost of something is what you give up to get it - ANSW-making decisions requires
comparing the costs and benefits of alternative course of action, cost isn't always obvious
opportunity cost - ANSW-whatever you have to give up to get something else
an opportunity cost is an opportunity lost
Principle #3: Rational People Think at the Margin - ANSW-rational people do their best they can to
achieve their objectives given the opportunities they have
they want the best things
marginal changes - ANSW-small incremental adjustment to a plan of action
they ask what is the benefit
Principle #4: People Respond to Incentives - ANSW-Marginal changes in costs or benefits motivate
people to respond
Principle #5: Trade Can Make Everyone Better Off - ANSW-Rather than being self-sufficient, people can
specialize in producing one good or service and exchange it for other goods
Principle #6: Markets are usually a good way to organize economic activity - ANSW-in a market economy,
firms and households interact to jointly determine prices and quantity (supply and demand)
market economy - ANSW-Economic decisions are made by individuals or the open market.
firms decide: - ANSW-whom to hire and what to make
households decide: - ANSW-what firms to work for and what to buy with their incomes
Principle #7: Governments Can Sometimes Improve Market Outcomes - ANSW-
Market failure - ANSW-a situation in which a market left on its own fails to allocate resources efficiently
market doesn't respond
market power - ANSW-the ability of a single economic actor (or small group of actors) to have a
substantial influence on market prices
are dominant, you have no control
externality - ANSW-the impact of one person's actions on the well-being of a bystander (like pollution)
property rights - ANSW-the ability of an individual to own and exercise control over scarce resources
, Principle #8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services -
ANSW-differences in living standards among countries is attributable to productivity
productivity - ANSW-the quantity of goods and services produced from each unit of labor input
Principle #9: Prices Rise When the Government Prints Too Much Money - ANSW-too much money
chasing after too little goods (inflation)
inflation - ANSW-A general and progressive increase in prices
caused by the growth in the quantity of money
Principle #10: Society faces a short-run tradeoff between inflation and unemployment - ANSW-the
tradeoff can be observed in the analysis of the business cycle
low inflation high unemployment
business cycle - ANSW-Fluctuations in economic activity, such as employment and production
Microeconomics - ANSW-the study of how households and firms make decisions and how they interact
in markets
macroeconomics - ANSW-the study of economy-wide phenomena, including inflation, unemployment,
and economic growth
positive analysis - ANSW-analysis concerned with what is
minimum wage laws cause unemployment
normative analysis - ANSW-analysis concerned with what ought to be
the government should raise the minimum wage
absolute advantage - ANSW-the ability to produce a good using fewer inputs than another producer
comparative advantage - ANSW-the ability to produce a good at a lower opportunity cost than another
producer
perfect competition - ANSW-to reach this highest form of competition, a market must have the two
characteristics:
1. the goods offered for sale are all exactly the same
2. buyers and sellers are so numerous that no single buyer and seller has any influence over the market
price
price takers - ANSW-buyers and sellers must accept the price the market determines
Monopoly - ANSW-A market in which there are many buyers but only one seller.
produces where MC=MR
profit-maximizing output when P>MC
quantity demanded - ANSW-the amount of a good that buyers are willing and able to purchase
law of demand - ANSW-the quantity demanded of a good falls when price of the good rises
market demand - ANSW-the sum of all the individual demands for a particular good or service
normal good - ANSW-an increase in income leads to an increase in demand
inferior good (demand) - ANSW-an increase in income leads to a decrease in demand
price of related goods (demand) - ANSW-substitutes and complements
tastes (demand) - ANSW-consumer preferences; likes and dislikes in consumption; assumed to be
constant along a given demand curve
