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Questions and Answers
What is the primary condition for a market to function efficiently?
What occurs when the market fails to allocate resources efficiently?
What is the impact of one person or firm's actions on the well-being of a bystander?
What is the ability of a single person or firm to unduly influence market prices?
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What is the primary factor that determines a country's standard of living?
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What is the amount of goods and services produced from each hour of a worker's time?
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Why may a government intervene in a market?
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What is the result of a country's ability to produce goods and services?
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What is the concept of opportunity cost?
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What is the principle of rational people thinking at the margin?
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What is the main idea behind the principle that people respond to incentives?
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What is the main advantage of trade according to Principle #5?
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What is the main characteristic of a market economy?
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What is the concept of the invisible hand?
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What is the main idea behind the principle that markets are usually a good way to organize economic activity?
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What is the result of households and firms interacting in markets?
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What is the origin of the word 'economy'?
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What is a fundamental problem faced by households and economies?
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What is the definition of scarcity?
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What is the study of?
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What is the principle that states that people face trade-offs?
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What is the meaning of 'efficiency' in the context of economics?
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Why do people make decisions?
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What is the cost of something?
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Study Notes
Principles of Economics
- Economics is the study of how society manages its scarce resources.
Scarcity
- Resources are limited, and therefore society cannot produce all the goods and services people wish to have.
- Scarcity means making decisions requires trading off one goal against another.
Principle #1: People Face Trade-offs
- To get one thing, we usually have to give up another thing (e.g., guns vs. butter, food vs. clothing, leisure time vs. work, efficiency vs. equity).
- "There is no such thing as a free lunch!"
- Efficiency means society gets the most that it can from its scarce resources.
- Equity means the benefits of those resources are distributed fairly among the members of society.
Principle #2: The Cost of Something Is What You Give Up to Get It
- Decisions require comparing costs and benefits of alternatives (e.g., whether to go to college or to work).
- The cost of something is what you give up to get it (opportunity cost).
Principle #3: Rational People Think at the Margin
- Marginal changes are small, incremental adjustments to an existing plan of action.
- People make decisions by comparing costs and benefits at the margin.
Principle #4: People Respond to Incentives
- Marginal changes in costs or benefits motivate people to respond.
- The decision to choose one alternative over another occurs when that alternative's marginal benefits exceed its marginal costs.
Principle #5: Trade Can Make Everyone Better Off
- People gain from their ability to trade with one another.
- Competition results in gains from trading.
- Trade allows people to specialize in what they do best.
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity
- A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
- Households decide what to buy and who to work for.
- Firms decide who to hire and what to produce.
- Adam Smith's "invisible hand" concept: households and firms interacting in markets act as if guided by an "invisible hand" that leads to socially beneficial outcomes.
Principle #7: Governments Can Sometimes Improve Market Outcomes
- Markets work only if property rights are enforced.
- Property rights are the ability of an individual to own and exercise control over a scarce resource.
- Market failure occurs when the market fails to allocate resources efficiently.
- Government can intervene to promote efficiency and equity when the market fails (e.g., due to externalities or market power).
Principle #8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
- A country's standard of living may be measured by comparing personal incomes or the total market value of a nation's production.
- Almost all variations in living standards are explained by differences in countries' productivities.
- Productivity is the amount of goods and services produced from each hour of a worker's time.
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Description
This quiz covers fundamental principles of economics, including opportunity cost, marginal thinking, and responding to incentives. Learn how to make rational decisions by weighing costs and benefits.
