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Unformatted text preview: Chapter 1 Page 8 The four principles of economic decision making are: (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; and (4) people respond to incentives. People face trade-offs because to get one thing that they like, they usually have to give up another thing that they like. The cost of something is what you give up to get it, not just in terms of monetary costs but all opportunity costs. Rational people think at the margin by taking an action if and only if the marginal benefit exceeds the marginal cost. People respond to incentives because they choose activities by comparing benefits to costs; therefore, a change in these benefits or costs may cause their behavior to change. Page 11 The three principles concern- ing peoples economic interactions are: (1) trade can make everyone better off; (2) markets are usually a good way to organize economic activity; and (3) governments can sometimes improve market out- comes. Trade can make everyone better off because it allows coun- tries to specialize in what they do best and to enjoy a wider variety of goods and services. Markets are usually a good way to organize economic activity because the invis- ible hand leads markets to desir- able outcomes. Governments can sometimes improve market out- comes because markets may fail to allocate resources efficiently due to an externality or market power. Page 14 The three principles that describe how the economy as a whole works are: (1) a countrys standard of living depends on its ability to produce goods and ser- vices; (2) prices rise when the gov- 553 A P P E N D I X : Q U I C K Q U I Z A N S W E R S ernment prints too much money; and (3) society faces a short-run trade-off between inflation and unemployment. A countrys stan- dard of living depends largely on the productivity of its workers, which in turn depends on the edu- cation of its workers and the access its workers have to the necessary tools and technology. Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation. Society faces a short-run trade-off between inflation and unemployment that is only temporary. Policymakers have some short-term ability to exploit this relationship using various pol- icy instruments. Chapter 2 Page 28 Economics is like a science because economists devise theories, collect data, and analyze the data in an attempt to verify or refute their theories. In other words, economics is based on the scientific method. Figure 21 shows the production possibilities frontier for a society that produces food and clothing. Point A is an efficient point (on the frontier), point B is an inefficient point (inside the frontier), and point C is an infeasible point (out- side the frontier)....
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This note was uploaded on 12/21/2010 for the course BUSA 5364 taught by Professor Greg during the Spring '08 term at UT Arlington.
- Spring '08
- Decision Making