Economics Exam 1

Opportunity cost principle

The true cost of any choice is the value of the best alternative you give up making that decision. (ex. If a company uses $50,000 to upgrade company computers instead of investing it in the market for a 10% return, the 10% is the opportunity cost)

cost-benefit principle

You should only take action or make a decision only if the extra benefit from doing so is greater than or equal to the extra costs. (Ex. The $40 v $50 coffee machine example)

marginal benefit principle

You should only continue an activity as long as the additional satisfaction or revenue from one more unit (marginal benefit) is greater than or equal to the additional cost (marginal cost). (The pizza slice example)

interdependence principle

Your best choice depends on your other choices, what other people do, changes in other markets, and expectations for the future. (No decision is made in isolation)

demand slopes downward due to…

a) diminishing marginal benefit

b) diminishing marginal cost

c) rising marginal benefit

d) rising marginal cost

a) diminishing marginal benefit

what is economics the study of?

how people make choices

what is scarcity?

people can’t have everything they want

how do you find surplus with a word problem?

your value of item (minus) price of item = (positive number meaning buy), (negative number means don’t buy)

what is one reason why the supply of an item would decrease?

if the ingredients or items used to make the real item decrease or there are less of them

how can we ration a product without using price?

• first come first serve

• lottery system

if my consumers have an inelastic own-price elasticity, and I want to raise revenue, should I:

a) lower price

b) increase price

c) keep price unchanged

d) hope they my competition raises their price

b) increase price

what is an inelastic good?

what is an elastic good?

after some shift, the price of a good increased and the quality fell. What happened?

a) demand increased

b) demand decreased

c) supply increased

d) supply decreased

d) supply decreased (sketch it out!)

an economy where there is no government intervention at all is called what?

a laissez faire economy

what is a command and control economy?

what is a hybrid economy?

what is a normative statement?

a statement of opinion based on perspective