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Questions and Answers
Which of the following is an example of a personal decision involving trade-offs?
What is meant by opportunity cost?
The cost of giving up one opportunity in order to take another.
Rational people think at the margin.
True
What should decision makers be aware of when making decisions?
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A country’s standard of living depends on its ability to produce __________ and __________.
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Markets are usually a bad way to organize economic activity.
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Which principle states that prices rise when the government prints too much money?
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Study Notes
Ten Principles of Economics
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People Face Trade-offs:
- There is no such thing as a free lunch.
- To get one thing, we usually have to give up another.
- Examples:
- Choosing to study instead of working part-time.
- Allocating the budget to healthcare means less funding for education.
- A company deciding between investing in new technology or expanding its workforce.
The Cost of Something Is What You Give Up to Get It
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Opportunity Cost:
- Cost of giving up one opportunity in order to take another.
- The ‘next best alternative’ that must be given up comes with a cost.
- Decision makers should be aware of the opportunity costs associated with each possible action.
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Examples:
- Studying for exams instead of spending time with friends: the time spent with friends is the opportunity cost.
- Choosing a job straight out of university or taking a gap year: giving up a job means giving up money, and giving up a gap year means giving up travel and experience.
Rational People Think at the Margin
- Rational people: Systematically and purposefully make the best decisions to achieve their objectives, given the available opportunities.
- Marginal changes: Small, incremental adjustments to an existing plan of action.
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Rational decisions: Comparing additional (marginal) benefits of an action to its additional (marginal) costs.
- If the marginal benefit exceeds the marginal cost, the action is considered rational.
- Marginal Benefit: The extra benefit a producer gets from producing one more unit of a good.
- Marginal Cost: The extra cost to produce additional units of goods or services.
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Example: A student deciding whether to study an extra hour:
- Marginal benefit: Higher score, potentially leading to a better grade.
- Marginal cost: Less sleep, increased stress, missing out on social activities.
- Decision depends on whether the perceived benefit outweighs the cost.
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Example: A firm deciding whether to produce one more unit of a product:
- Marginal cost: Additional expenses for materials, labor, and energy.
- Marginal benefit: Additional revenue from selling it.
- It’s rational for the firm to produce the additional unit if the marginal revenue exceeds the marginal cost.
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Description
Explore the fundamental concepts of economics including trade-offs and opportunity cost. This quiz will challenge your understanding of how decisions impact costs and benefits in everyday scenarios. Perfect for students learning the basics of economic principles.
