Transcript People Face Trade-offs #2: The Cost of Something Is What You Give

Economics 101
TEN PRINCIPLES OF ECONOMICS
#1: People Face Trade-offs
#2: The Cost of Something Is What You Give Up to Get It
#3: Rational People Think at the Margin
#4: People Respond to Incentives
#5: Trade Can Make Everyone Better Off
#6: Markets Are Usually a Good Way to Organize Economic
Activity
#7: Governments Can Sometimes Improve Market Outcomes
#8: A Country’s Standard of Living Depends on Its Ability to
Produce Goods and Services
#9: Prices Rise When the Government Prints Too Much Money
#10: Society Faces a Short-run Trade-off between Inflation and
Unemployment
1. Economics deals primarily with the concept of?
A. poverty.
B. change.
C. power.
D. scarcity.
A Looming International Crisis
2. 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 restricts production of too many goods and
services.
D. resources are limited.
3. A society strives to get the most it can from its scarce
resources. It also tries to distribute the benefits of those
resources to its members in a fair manner. In other words,
the society faces a tradeoff between
A. guns and butter.
B. efficiency and equity.
C. inflation and unemployment.
D. work and leisure.
– 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.
5¢ Lodging, New York
(1890s)
The Breakers Mansion,
Vanderbilt Family
Newport (1890s)
19. To become more efficient, economies seek to increase
productivity. Productivity is defined as the
A. number of workers required to produce a given amount
of goods and services.
B. amount of labor which can be saved by replacing
workers with machines.
C. amount of effort workers put into an hour of working
time.
D. amount of goods and services produced from each hour
of a worker’s time.
4. In economics, the cost of something is
A. the dollar amount of obtaining it.
B. always measured in units of time given up to get it.
C. what you give up to get it.
D. often impossible to quantify, even in principle.
7. To say that “people respond to incentives” is to say that
A. changes in costs (but not changes in benefits) influence
people's decisions and their behavior.
B. changes in benefits (but not changes in costs) influence
people's decisions and their behavior.
C. changes in benefits or changes in costs influence
people's decisions and their behavior.
D. tradeoffs can be eliminated by rational people who think
at the margin.
5. What you give up to obtain an item is called your
A. opportunity cost.
B. explicit cost.
C. true cost.
D. direct cost.
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6. Making rational decisions “at the margin” means that
people
A. make those decisions that do not impose a marginal
cost.
B. evaluate how easily a decision can be reversed if
problems arise.
C. compare the marginal costs and marginal benefits of
each decision.
D. always calculate the marginal dollar costs for each
decision.
8. Which of the following observations was made famous
by Adam Smith in his book The Wealth of Nations?
A. There is no such thing as a free lunch.
B. People buy more when prices are low than when prices
are high.
C. No matter how much people earn, they tend to spend
more than they earn.
D. Households and firms interacting in markets are guided
by an “invisible hand” that leads them to desirable
market outcomes.
9. The “invisible hand” directs economic activity through
A. advertising. .
B. price.
C. central planning.
D. government regulations.
11. A rationale for government involvement in a market
economy is as follows:
A. Markets sometimes fail to produce a fair distribution of
economic well-being.
B. Markets sometimes fail to produce an efficient allocation
of resources.
C. Property rights have to be enforced.
D. All of the above are correct.
12. Government policies can change the costs and benefits
that people face. Those policies have the potential to
A. alter people’s behavior.
B. alter people’s decisions at the margin.
C. produce results that policymakers did not intend.
D. All are correct.
13. When the government prevents prices from adjusting
naturally to supply and demand,
A. it stabilizes the economy by reducing market
uncertainties.
B. it adversely affects the allocation of resources.
C. the improvement in equity justifies the reduction in
efficiency.
D. the improvement in efficiency justifies the reduction in
equity.
14. Prior to the collapse of communism in Europe,
communist countries worked on the premise that
economic well-being could be best attained by
A. a market economy.
B. a strong reliance on prices and individuals’ self-interests.
C. a system of large, government-operated, privately-owned
firms.
D. the actions of government central planners.
Where an excess of power prevails, property of no sort is duly respected. No man is
safe in his opinions, his person, his faculties, or his possessions.
Where there is an excess of liberty, the effect is the same, tho' from an opposite cause.
Government is instituted to protect property of every sort; as well that which lies in
the various rights of individuals, as that which the term particularly expresses. This
being the end of government, that alone is a just government, which impartially
secures to every man, whatever is his own.
James Madison
10. For markets to work well, there must be
A. property rights.
B. market power.
C. a central planner.
D. abundant, not scarce, resources.
Summary of Economic Systems
Communism
Socialism
Mixed
Economy
Laissez-faire
Economy
Government controls
all aspects of the
economy – “Command
Economy”
Governments
owns major
industries
Government
regulates industries
for the protection of
workers and
consumers
The market
controls the
economy,
following Adam
Smith’s idea of
the “Invisible
Hand” of supply
and demand
No Private Property
Private Property
Exists
Private Property
Exists
Private Property
Exists
Soviet Union
Red China
Cuba
North Korea
Sweden and
most of Western
Europe
Venezuela
United States
Canada
Japan
Chile
No countries
currently operate
as purely laissezfaire economies
17. The primary determinant of a country's standard of
living is
A. the country’s ability to produce goods and services.
B. the country’s ability to prevail over foreign competition.
C. the total supply of money in the economy.
D. the average age of the country's labor force.
20. The health (growth or decline) of a country’s economy is
measured by comparing GDP over time. GDP stands for
A. General Domestic Production
B. Generational Depreciation of Productivity
C. Gross Domestic Product
D. Greater Determinant of Production
Gross Domestic Product measures the total value of goods and
services produced within a country in a year.
Gross National Product measures the total value of goods and
services produced by a country in a year.
22. The business cycle is the
A. relationship between unemployment and inflation.
B. irregular fluctuations in economic activity.
C. positive relationship between the quantity of money in
an economy and inflation.
D. predictable changes in economic activity due to
changes in government spending and taxes.
Unemployment
Inflation
23. Most economists believe that an increase in the
quantity of money results in
A. an increase in the demand for goods and services.
B. lower unemployment in the short run.
C. higher inflation in the long run.
D. All of the above are correct.
24. Which of the following is most likely to reduce the
amount of money in an economy?
A. high fuel prices
B. high interest rates
C. high national debt
D. high corporate taxes
25. Which of the following benefits most from an increase in
the amount of money in an economy?
A. creditors
B. debtors
C. multinational corporations
D. unionized industrial workers
You shall not press down upon the brow of
labor this crown of thorns. You shall not
crucify mankind upon a cross of gold.
26. From an economic standpoint, what is the most important
action a government can take to reduce the irregular
fluctuations in economic activity?
A. allow markets to determine supply and demand
B. breakup monopolies to enhance competition
C. eliminate taxes on capital gains
D. regulate the amount of money in the economy
27. Which of the following regulates the amount of money
in the U.S. economy?
A. Congressional Budget Office
B. Federal Reserve Board
C. Office of Economic Advisers
D. Government Accounting Office
The Federal Reserve can control the money supply via three
main mechanisms:
1. Raising or lowering interest rates (i.e. the “Discount
Rate”)
2. Buying or selling currency on the open market (i.e. to
banks)
3. Increasing or decreasing the amount of money banks
must keep in reserves to ensure deposits
28. If the reserve ratio is 10 percent, banks do not hold excess reserves,
and people do not hold currency, then when the Fed purchases $20
million of government bonds, bank reserves
A. increase by $20 million and the money supply eventually increases
by $200 million.
B. decrease by $20 million and the money supply eventually increases
by $200 million.
C. increase by $20 million and the money supply eventually decreases
by $200 million.
D. decrease by $20 million and the money supply eventually decreases
by $200 million.
TEN PRINCIPLES OF ECONOMICS
#1: People Face Trade-offs
#2: The Cost of Something Is What You Give Up to Get It
#3: Rational People Think at the Margin
#4: People Respond to Incentives
#5: Trade Can Make Everyone Better Off
#6: Markets Are Usually a Good Way to Organize Economic
Activity
#7: Governments Can Sometimes Improve Market Outcomes
#8: A Country’s Standard of Living Depends on Its Ability to
Produce Goods and Services
#9: Prices Rise When the Government Prints Too Much Money
#10: Society Faces a Short-run Trade-off between Inflation and
Unemployment
The
End