Chapter 1 Econ 2202

Scarcity

Fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. 

Trade-offs

Every choice involves a trade-off; the next best alternative is foregone. 

Economics

Study of how people manage resources and respond to incentives. 

Efficiency

Optimal use of resources to maximize the production of goods and services. 

Equality

Distribution of economic prosperity among the members of society. 

Opportunity Cost

The cost of the next best alternative foregone when making a choice; includes both explicit and implicit costs. 

Calculations

Determine opportunity cost by analyzing what is sacrificed for a chosen option. 

Incentive

A benefit offered to encourage people to act in a certain way. 

Rationality

Assumption that individuals act logically and make decisions that provide them with the greatest benefit or satisfaction. 

Marginal Change

A small, incremental adjustment to a plan of action. 

Market Economy

An economic system where decisions are made based on supply and demand; prices are determined in the marketplace. 

Market Failure

A situation in which the allocation of goods and services is not efficient. 

Trade

Exchange of goods and services, enhancing specializations and overall economic gains. 

Benefit of Trade

Increases variety, lowers costs, enhances efficiency. 

Market Organization

Markets effectively allocate resources, driven by prices and competition. 

Central Planning vs. Market Economics

Central planning involves government decisions, while market economics is decentralized decision-making. 

Mixed Economies

Economic systems that incorporate elements of both market and planned economies. 

Property Rights

Legal rights to use resources, which encourage investment and economic prosperity. 

Question #2: You have the afternoon free. You have a choice between going to the movies with a friend and studying economics for three hours. If you go to the movies, you will spend $8.00 on a ticket and $4.50 on popcorn. If you choose to study economics for three hours, you will raise your exam grade by 10 points.

2a) What is your opportunity cost of going to the movies?

Answer: Your opportunity cost is $12.50 [$8.00 (movie ticket) + $4.50 (popcorn)] and 10 points on your exam grade

2b) What is your opportunity cost of studying economics?

Answer: The enjoyment you would have received from going to the movies with your friend.

3) Debbie quits her job, which pays $30,000 a year, to finish her college degree. Her annual college expenses are $10,000 for tuition, $2,000 for books, and $700 for food. What is her opportunity cost of attending college for the year?

Answer: The opportunity cost includes cost of tuition, books, and value of the salary she would have earned if she had continued to work. $10,000+$2,000+$30,000= $42,000. We don’t include the cost of food because she would spend on food either way.

4) Melinda quits her job at a bank, which pays $30,000 a year, to enroll in a two-year graduate program. Her annual school expenses are $22,000 for tuition and fees and $2,000 for books. What is her opportunity cost of attending the two-year graduate program? $108,000

Answer: The opportunity cost for two-years of the graduate program is twice the opportunity cost of attending college for one year. The opportunity cost for one year includes cost of tuition, books, and value of the salary she would have earned if she had continued to work. $22,000+$2,000+$30,000= $54,000. But need the opportunity cost for two years. So multiply by 2. $54,000 x 2= $108,000 The opportunity cost for attending two years of the graduate program is $108,000.