Economics Chapters 1-4 Review (Micro)-Test 1

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Economics Chapters 1-4 Review (Micro)
Chapter 1: What’s in Economics for you? (Scarcity, Opportunity Cost, and
Economics: How individuals, businesses, and governments make the best possible
choices to get what they want, and how these choices interact in the market.
Scarcity: The problem that arises because we all have limited; money, time. And
-Scarcity means every choice involves a trade-off
-Every dollar you spend involves choice, and because of scarcity it must be a smart
Opportunity Cost: Cost of best alternative given up.
-Opportunity Cost is the key to mutual benefits from trade.
-In weighing the benefits and costs of any decision, we compare what we get from each
fork which what we give up from the other. For any choice (What we get), Its true cost
is what we have to give up to get it.
Incentives: Rewards and penalties for choice
Voluntary Trade: With voluntary trade, each person feels that what he or she gets
is of grater value then what he or she gives up.
-When you “trade” money for coffee at Tim’s that is a voluntary exchange. If you
thought you would be better off keeping the money instead of the coffee, you wouldn’t
pay. If Tim’s weren’t better off with your money instead of coffee, they wouldn’t sell.
Absolute Advantage: Ability to produce a product at a lower absolute cost than
another producer
Comparative Advantage: Ability to produce a product at a lower opportunity cost
than another producer.
-To determine comparative advantage it is best to use opportunity cost and measure it
per unite of the product chosen.
Opportunity Cost = Give Up
-Opportuity cost of any choice is the value of the fork in the rode not taken
-Voluntary tade is not a zero-sum game, whre one persons gain is the others loss. Both
traders gain. Mutualy bennifical gains from trade are caused by differnece in
comparative advantage. Absolute advantage Is not important.
-Indivisuals in household untimatly own all the imputs of an economyLabout (The
ability to work), Narutal resources, capital equiptment, and entrpernual ability.
-Imput markets: Where businesses buy the imputs they need to produce a product or
-Output markets: Where businesses sell there poducts/services.
-When Mr. Sub higers you to work, that interation happens in an input market.
Microeconomics: Analizes the choises that individuals in households, indidvual
businesses, and govenrments make, and how these choices interact in the market.
Macroeconomics: Analaizes performane of the whole candain ecnomy and global
economy, the comied ourcomes of all micro-economic choices.
Key Number One: Choose only when aditional benefits are greather than aditional
opportunity cost.
-Always consider opportunity cost not just money cost.
Key Number Two: Count only additional benefits and aditional opportunity cost.
-When sanding at a fork in the road always look forward, never back.
-Your choices should weight addtional benefit from the next hour of studing againts
the additional cost (giving up sleep or an hour of work). Its not the total benefit of all
hours spent studing or the average benefit of an hour of studying that matters, only
the additional benefit (looking forward).
-Economist often use the term Marginal instead of Aditional, therefore key number
two can also be read “Count only Marginal Benefits and Marginal Oportunity
Key Number Three: Be sure to count all additional benefit and costs, inlcuing
Implicit costs and extrnailites.
-Economists use the term implicit costs to describe the opportunity costs of investing
your own money or time.
-Economist call the costs you create but don’t pay dircectly, Negative Externalities.
(Car pollution emitted)
-Positive externalities are benefits that affect others who are eternal to a choice or
trade. (Home renovation and property value of a neighborhood)
Marginal benefits: additional benefits from next choice, and changes with
Marginal Opportunity Cost: additional opportunity costs from next choice.
Implicit Costs: Opportunity costs of investing your own money or time.
Chapter 2: Making Smart Choices (The Law of Demand)
-All choices are based (consciously or not) on a comparison of expected benefits and
costs. (Key #1)
-The expected benefit question is “How badly do you want it?” What satisfaction do
you expect to get form that choice?
-Economists describe all your wantsand how intense each want isas your
-For the second part of the comparison, the cost question is, “How much are you
willing to give up for it?”
-What you are willing to give up depends on availability of substitutes and their cost.
-What you can “afford” is not just about money, it is also about time. You have limited
dollars and limited time.
Demand: Consumers willingness and ability to pay for a particular product or
-You make a smart choice when expected benefits are greater than opportunity costs.
But the benefits or satisfaction you expect to get depend on the circumstances.