Economics Test Review

Economics Test Review - Chapter 1 Economy- comes from the...

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Chapter 1 Economy- comes from the Greek word oikonomos, which means “one who manages a household.” Scarcity-the limited nature of society’s resources Economics-the study of how society manages its scarce resources. Ten Principles of Economics 1) People face trade-offs a. Consider a student who must decide how to allocate her most valuable resource, her time. She can spend all of her time studying economics; she can spend all of her time studying psychology; or she can divide her time between the two fields. For every hour she studies one subject, she gives up an hour she could have used studying the other. And for every hour she spends studying, she gives up an hour that she could have spent napping, bike riding, watching TV, or working at her part-time job for some extra spending money. b. Another trade off is between efficiency and equity. Efficiency-those benefits are distributed fairly among society’s members. 2) The cost of something is what you give up to get it a. Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action. In many cases, however, the cost of some action is not as obvious as it might first appear. Consider, for example, the decision to go to college. The benefit is intellectual enrichment and a lifetime of better job opportunities. But what is the cost? To answer this question, you might be tempted to add up the money you spend on tuition, books, room, and board. Yet this total does not truly represent what you give up to spend a year in college. b. The first problem with this answer is that it includes some things that are not really costs of going to college. Even if you quit school, you need a place to sleep and food to eat. Room and board are costs of going to college only to the extent that they are more expensive at college than elsewhere. Indeed, the cost of room and board at your school might be less than the rent and food expenses that you would pay living on your own. In this case, the savings on room and board are a benefit of going to college. c. The second problem with this calculation of costs is that it ignores the largest cost of going to college on your time. When you spend a year listening to lectures, reading textbooks, and writing papers, you cannot spend that time working at a job. For most students, the wages given up to attend school are the largest single cost of their education. d. The opportunity cost of an item is what you give up to get that item. When making any decision, such as whether to attend college, decision makers should be aware of the opportunity costs that accompany each possible action. In fact, they usually are. College athletes who can earn millions if they drop out of school and play professional sports are well aware that their opportunity cost of college is very high. It is not surprising that they often decide that the benefit is not worth the cost.
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3) Rational people think at the margin c. Rational people systematically and purposefully do the best they can to achieve
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Economics Test Review - Chapter 1 Economy- comes from the...

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