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Unformatted text preview: Chapter Getting Started CHAPTER CHECKLIST Chapter 1 defines economics, discusses the three major questions of what, how, and for whom, covers the five core economic ideas that shape how economists think about issues, defines the differences be‐ tween microeconomics and macroeconomics, and examines methods used by economists to study the economic world. Define economics and explain the kinds of questions that economist try to answer. Economic questions exist because of scarcity, the point that wants exceed the ability of resources to satisfy them. Economics is the social science that studies the choices that individuals, businesses, gov‐ ernment, and entire societies make as they cope with scarcity and the incentives that influence these choices. Economics studies how choices wind up determining: what goods and services get produced?; how are goods and services produced?; and for whom are goods and services produced? Economics also studies when choices made in someone’s self‐interest also serve the social interest. For instance, are the self‐interested choices made about globalization and international outsourcing, use of tropical rain for‐ ests, and social security also promote the social interest about these issues? Explain the core ideas that define the economic way of thinking. The five ideas that are the core of the economic approach: people make rational choices by comparing benefits and costs; cost is what you must give up to get something; benefit is what you gain when you get something and is measured by what you are willing to give up to get it; a rational choice is made on the margin; and choices respond to incentives. A rational choice uses the available resources to most effectively satisfy the wants of the person making the choice. The opportunity cost of an activity is the highest‐valued alternative forgone. The benefit of a good or service is the gain or pleasure it brings and is measured by what someone is willing to give up to get the good or service. Making choices on the margin means comparing all the relevant alternatives systematically and incrementally to determine which is the best choice. A choice on the margin is one that adjusts a plan. The marginal cost is the cost of a one‐unit increase in an activity; the marginal benefit is the gain from a one‐unit in‐ crease in an activity. Rational choices compare the marginal benefit of an activity to its marginal cost. Microeconomics studies choices made by individuals and businesses. Macroeconomics studies the na‐ tional economy and global economy. Statements about “what is” are positive statements; statements about “what should be” are normative statements. Economists are interested in positive statements about cause and effect but determining causality can be difficult because usually many things change simultaneously. So economists often use the idea of ceteris paribus, a Latin term that means “other things equal” and is used to sort out the effect of individual influence. Correlation is the tendency for the values of two variables to move together in a predictable way. Economics can be used by individu‐ als, business, and governments as a policy tool to help them make better decisions. 2 Part 1 . INTRODUCTION CHECKPOINT 1.1 Define economics and explain the kinds of questions that economist try to answer. Quick Review • Self‐interest The choices that people make that they think are the best for them. • Social interest The choices that are best for society as a whole. Additional Practice Problems 1.1 1. Which of the following headlines deals with what, how, and for whom questions?: a. A new government program is designed to provide high‐quality school lunches for children from poorer families. b. Intel researchers discover a new chip‐ making technology. c. Regis Hairstyling sets a record for hair‐ stylings in month of July 2. Which of the following headlines concern so‐ cial interest and self interest? a. A new government program is designed to provide high‐quality school lunches for children from poorer families. b. Intel researchers discover a new chip‐ making technology. c. Regis Hairstyling sets a record for hair‐ stylings in month of July. Solutions to Additional Practice Problems 1.1 1a. “More lunches” is a what question and “for children from poorer families” is a for whom question. 1b. “New chip‐making technology” is a how question because it deals with how computer chips will be manufactured. 1c. “Record for hairstylings” is a what question because it notes that a record number of hairstylings have taken place in July. 2a. The decision to implement a new govern‐ ment program is a decision that is most likely made in the social interest. The self‐ interest of the government bureaucrat who made the decision might also be involved, particularly if the bureaucrat also will help manage the program. 2b. Intel’s decision to research new chip‐making technology is made in Intel’s self‐interest. 2c. Regis’s decision to offer hairstylings is made in its self‐interest as are the decisions of the people who had their hair styled by Regis. Self Test 1.1 Fill in the blanks Economic questions arise because ____ (human wants; resources) exceed the ____ (human wants; resources) available to satisfy them. Faced with ____, people must make choices. Choices that are the best for the person who makes them are choices made in ____ (self‐ interest; social interest). Choices that are best for everyone as a whole are choices made in ____ (self‐interest; social interest). True or false 1. Faced with scarcity, we must make choices. 2. The question of what refers to what produc‐ tion method should a firm use? 3. The answers to the what, how and for whom questions depend on the interactions of the choices people, businesses, and governments make. 4. If Sam buys a pizza because she is hungry, her choice is made in the social interest. 5. Because everyone is a member of society, all choices made in self‐interest are also in the social interest. Multiple choice 1. The characteristic from which all economic problems arise is a. political decisions. b. providing a minimal standard of living for every person. c. how to make a profit. d. hunger. e. scarcity. Chapter 1 . Getting Started 3 2. Scarcity results from the fact that a. people’s wants exceed the resources avail‐ able to satisfy them. b. not all goals are desirable. c. we cannot answer the major economic questions. d. choices made in self‐interest are not al‐ ways in the social interest. e. the population keeps growing. 3. To economists, scarcity means that a. limited wants cannot be satisfied by the unlimited resources. b. a person looking for work is not able to find work. c. the number of people without jobs rises when economic times are bad. d. there can never be answers to the what, how or for whom questions. e. unlimited wants cannot be satisfied by the limited resources. 4. The question “Should we produce video tapes or DVD discs?” is an example of a ____ question. a. what b. how c. for whom d. where e. why 5. The question “Should we produce houses us‐ ing bricks or wood?” is an example of a ____ question. a. what b. how c. for whom d. where e. why 6. The question “Should economics majors or sociology majors earn more after they gradu‐ ate?” is an example of a ____ question. a. what b. how c. for whom d. where e. why 7. If a decision is made and it is the best choice for society, the decision is said to be a. a valid economic choice. b. made in self‐interest. c. made in social interest. d. consistent with scarcity. e. a want‐maximizing choice. Short answer and numeric questions 1. Will there ever come a time without scarcity? 2. If there was no scarcity, would there be a need for economics? 3. What are the three major questions answered by people’s economic choices? 4. Why is the distinction between choices made in self‐interest and choices made in social in‐ terest important? CHECKPOINT 1.2 Explain the core ideas that define the economic way of thinking. Quick Review • Opportunity cost The opportunity cost of something is the best thing you must give up to get it. • Marginal cost The opportunity cost that arises from a one‐unit increase in an ac‐ tivity. • Marginal benefit The benefit that arises from a one‐unit increase in an activity. • Rational choice A choice that uses the available resources to most effectively satisfy the wants of the person making the choice. • Positive statement A positive statement tells what is currently understood about the way the world operates. We can test a positive statement. • Normative statement A normative state‐ ment tells what ought to be. It depends on values. We cannot test a normative statement. 4 Part 1 . INTRODUCTION Practice Problems 1.2 1. What are the opportunity costs of using this Study Guide? 2. Kate usually plays tennis for two hours a week and her grade on each math test is usually 70 percent. Last week, after playing two hours of tennis, Kate thought long and hard about play‐ ing for another hour. She decided to play an‐ other hour of tennis and cut her study time by one additional hour. But the grade on last week’s math test was 60 percent. a. What was Kate’s opportunity cost of the third hour of tennis? b. Given that Kate made the decision to play the third hour of tennis, what can you conclude about the comparison of her marginal benefit and marginal cost of the second hour of tennis? c. Was Kate’s decision to play the third hour of tennis rational? 3. Classify each of the following statements as positive or normative: a. There is too much poverty in the United States. b. An increase in the gas tax will cut pollu‐ tion. c. Cuts to social security in the United States have been too deep. Solutions to Additional Practice Problems 1.2 1. The opportunity cost is mainly the time spent using the Study Guide because that time could be devoted to other activities. The highest‐valued activity forgone, be it study‐ ing for another class, or sleeping, or some other activity, which is forgone because of the time spent using the Study Guide is the opportunity cost. Once you have purchased this Study Guide, its price is not an opportu‐ nity cost of using the Study Guide because you have already paid the price. The price is, instead, a sunk cost. 2a. The opportunity cost of the third hour of ten‐ nis was the 10 percentage point drop on her math test grade because she cut her studying time by one hour to play an additional hour of tennis. If Kate had not played tennis for the third hour, she would have studied and her grade would not have dropped. 2b. Kate chose to play the third hour of tennis, so the marginal benefit of the third hour of ten‐ nis was greater than the marginal cost of the third hour. If the marginal benefit of the third hour of tennis was less than the mar‐ ginal cost of the third hour, Kate would have chosen to study rather than play tennis. 2c. Even though her grade fell, Kate’s choice used the available time to most effectively satisfy her wants because the marginal bene‐ fit of the third hour of playing tennis ex‐ ceeded the marginal cost of the third hour. This was a choice made in her self‐interest. 3a. A normative statement because it depends on the speaker’s values and cannot be tested. 3b. A positive statement because it can be tested by increasing the gas tax and then measuring the change in pollution. 3c. A normative statement because it depends on the speaker’s values (someone else might propose still deeper cuts) and cannot be tested. Self Test 1.2 Fill in the blanks A ____ choice uses the available resources to most effectively satisfy the wants of the person making the choice. The opportunity cost of an activity is ____ (all of the activities forgone; the highest‐valued alternative forgone). The benefit of an activity is measured by what you ____ (are willing to; must) give up. We make a ra‐ tional choice to do an activity if the marginal benefit of the activity ____ the marginal cost. (Macroeconomics; Microeconomics) ____ is the study of the choices of individuals and busi‐ nesses, the interaction of these choices, and the influences that governments exert on these classes. A statement that tells “what is” is a ____ (positive; normative) statement. A state‐ ment that tells “what ought to be” is a ____ (positive; normative) statement. The term Chapter 1 . Getting Started 5 meaning “other things being equal“ is ____ (ce‐ teris paribus; sunk cost). True or false 1. Instead of attending his microeconomics class for two hours, Jim can play a game of tennis or watch a movie. For Jim the oppor‐ tunity cost of attending class is forgoing the game of tennis and watching the movie. 2. Marginal cost is what you gain when you get one more unit of something. 3. A rational choice involves comparing the marginal benefit of an action to its marginal cost. 4. A change in marginal benefit or a change in marginal cost brings a change in the incen‐ tives that we face and leads us to change our actions. 5. The subject of economics divides into two main parts, which are macroeconomics and microeconomics. 6. The statement, “When more people volun‐ teer in their communities, crime rates de‐ crease” is a positive statement. Multiple choice 1. Jamie has enough money to buy either a Mountain Dew, or a Pepsi, or a bag of chips. He chooses to buy the Mountain Dew. The opportunity cost of the Mountain Dew is a. the Pepsi and the bag of chips. b. the Pepsi or the bag of chips, whichever the highest‐valued alternative forgone. c. the Mountain Dew. d. the Pepsi because it is a drink, as is the Mountain Dew. e. zero because he enjoys the Mountain Dew. 2. The benefit of an activity is a. purely objective and measured in dollars. b. the gain or pleasure that it brings. c. the value of its sunk cost. d. measured by what must be given up to get one more unit of the activity. e. not measurable on the margin. 3. The cost of a one‐unit increase in an activity a. is the total one‐unit cost. b. is called the marginal cost. c. decreases as you do more of the activity. d. is called the marginal benefit/cost. e. is called the sunk cost. 4. The marginal benefit of an activity is i. the benefit from a one‐unit increase in the activity. ii. the benefit of a small, unimportant activ‐ ity. iii. measured by what the person is willing to give up to get one additional unit of the activity. a. i only. b. ii only. c. iii only. d. i and iii. e. ii and iii. 5. If the marginal benefit of the next slice of pizza exceeds the marginal cost, you will a. eat the slice of pizza. b. not eat the slice of pizza. c. be unable to choose between eating or not eating. d. eat half the slice. e. More information is needed about how much the marginal benefit exceeds the marginal cost to determine if you will or will not eat the slice. 6. When people make rational choices, they a. behave selfishly. b. do not consider their emotions. c. weigh the costs and benefits of their op‐ tions and act to satisfy their wants. d. necessarily make a decision in the social interest. e. are necessarily making the best decision. 6 Part 1 . INTRODUCTION 7. Which of the following is a microeconomic issue? a. Why has unemployment risen nation‐ wide? b. Why has economic growth been rapid in China? c. What is the impact on the quantity of Pepsi purchased if consumers’ tastes change in favor of non‐carbonated drinks? d. Why is the average income lower in Africa than in Latin America? e. Why did overall production within the United States increase last year? 8. A positive statement a. must always be right. b. cannot be tested. c. can be tested against the facts. d. depends on someone’s value judgment. e. cannot be negative. 9. Which of the following is an example of a normative statement? a. If cars become more expensive, fewer people will buy them. b. Car prices should be affordable. c. If wages increase, firms will fire some workers. d. Fewer people die in larger cars than in smaller cars. e. Cars emit pollution. 10. The Latin term ceteris paribus means a. after this, therefore because of this. b. other things being equal. c. what is correct for the part is not correct for the whole. d. on the margin. e. when one variable increases, the other variable decreases. Short answer and numeric questions 1. What is an opportunity cost? 2. You have $12 and can buy a pizza, a movie on a DVD, or a package of CD‐Rs. You de‐ cide to buy the pizza and think that if you hadn’t been so hungry, you would have pur‐ chased the DVD. What is the opportunity cost of your pizza? 3. What is a sunk cost? 4. What is benefit and how is it measured? 5. What is a marginal cost? A marginal benefit? How do they relate to rational choice? 6. Explain the difference between microeco‐ nomics and macroeconomics. 7. Becky is writing an essay about the law that requires all passengers in a car to use a seat belt and its effectiveness. What might be a positive statement and a normative state‐ ment that she will include in her essay? Chapter 1 . Getting Started 7 SELF TEST ANSWERS CHECKPOINT 1.1 Fill in the blanks Economic questions arise because human wants exceed the resources available to satisfy them. Faced with scarcity, people must make choices. Choices that are the best for the person who makes them are choices made in self‐interest. Choices that are best for everyone as a whole are choices made in social interest. True or false 1. True; page 2 2. False; page 3 3. True; page 4 4. False; page 4 5. False; page 5 Multiple choice 1. e; page 2 2. a; page 2 3. e; page 2 4. a; page 3 5. b; page 3 6. c; page 4 7. c; page 4 Short answer and numeric questions 1. There will never be a time without scarcity because human wants are unlimited; page 2. 2. If there was no scarcity, then there likely would be no need for economics. Economics studies the choices that people make to cope with scarcity, so if there was no scarcity, then people’s choices would not be limited by scarcity; page 3. 3. The questions are “What goods and services get produced and in what quantities?”, “How are goods and services produced?”, and “For whom are the goods and services produced?” page 3. 4. In general economists believe that people make choices according to their self‐interest. These choices might or might not be in the social interest. Part of what economists study is when choices made in people’s self‐ interest also further the social interest; page 5. CHECKPOINT 1.2 Fill in the blanks A rational choice uses the available resources to most effectively satisfy the wants of the person making the choice. The opportunity cost of an activity is the highest‐valued alternative for‐ gone. The benefit of an activity is measured by what you are willing to give up. We make a ra‐ tional choice to do an activity if the marginal benefit of the activity exceeds the marginal cost. Microeconomics is the study of the choices of individuals and businesses, the interaction of these choices, and the influences that govern‐ ments exert on these classes. A statement that tells “what is” is a positive statement. A state‐ ment that tells “what ought to be” is a norma‐ tive statement. The term meaning “other things being equal“ is ceteris paribus. True or false 1. False; page 11 2. False; page 12 3. True; page 13 4. True; page 13 5. True; page 14 6. True; page 15 Multiple choice 1. b; page 11 2. b; page 11 3. b; page 12 4. d; page 12 5. a; page 13 6. c; page 13 7. c; page 14 8. c; page 15 9. b; page 15 10. b; page 15 8 Part 1 . INTRODUCTION Short answer and numeric questions 1. The opportunity cost of something is the highest‐valued other thing that must be given up. The opportunity cost is only the single highest‐valued alternative forgone, not all alternatives forgone; page 11. 2. The opportunity cost of the pizza is the high‐ est‐valued alternative forgone, which in this case is the DVD. The opportunity cost is not the DVD and the CD‐Rs because you would not have been able to purchase both of them with your $12; page 11. 3. A sunk cost is a previously occurred and ir‐ reversible cost; page 11. 4. The benefit of something is the gain or pleasure that it brings. Economists measure the benefit of something by what a person is willing to give up to get it; pages 11, 12. 5. Marginal cost is the cost of a one‐unit in‐ crease in an activity. Marginal benefit is the benefit of a one‐unit increase in an activity. A rational choice is made by comparing the marginal cost and marginal benefit, so that if the marginal benefit of an activity exceeds or equals the marginal cost, the activity is un‐ dertaken; pages 12‐13. 6. Microeconomics studies individual units within the economy, such as a consumer, a firm, a market, and so forth. Macroeconom‐ ics studies the overall, or aggregate, econ‐ omy, such as the overall unemployment rate, or overall economic growth rate; page 14. 7. A positive statement is “People who wear seat belts are involved in fewer road deaths.” This statement can be tested. A normative statement is “People should be free to choose whether to wear a seat belt or not.” This statement cannot be tested; page 15. ...
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This note was uploaded on 03/24/2009 for the course ECON 101 taught by Professor Balaban during the Spring '07 term at UNC.

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