Chapter 1

• What is the origin of the word "economy"?

  The Greek word "oikonomos," meaning "one who manages a household."
• How do households and economies have much in common?

  Both must allocate scarce resources among their members.
• What decisions must a household make regarding its members?


  Which tasks each member will perform and what they will receive in return.
• What is the significance of resource allocation in a household?


  It involves distributing scarce resources based on abilities, efforts, and desires.
• What does scarcity mean in economics?


  Resources are limited, preventing the production of all desired goods and services.
• What is the primary focus of economics?


  The study of how society manages its scarce resources.
• How are resources typically allocated in most societies?


  Through the combined choices of millions of households and firms.
• What do economists study regarding individual decisions?


  How much people work, what they buy, how much they save, and how they invest.
• What do economists analyze about the economy as a whole?


  The growth in average income, unemployment rates, and inflation rates.
• What are the Ten Principles of Economics?


  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.
  4. People respond to incentives.
  5. Trade can make everyone better off.
  6. Markets are usually a good way to organize economic activity.
  7. Governments can sometimes improve market outcomes.
  8. A country’s standard of living depends on its ability to produce goods and services.
  9. Prices rise when the government prints too much money.

  10. In the short run, there is a trade-off between inflation and unemployment.
• What does the saying "There ain't no such thing as a free lunch" imply?


  To get something we like, we usually have to give up something else.
• What is an example of a trade-off faced by a student?


  Deciding how to allocate time between studying economics and psychology.
• How do parents face trade-offs in spending their family income?


  They must choose between food, clothing, vacations, or saving for retirement.
• What is the classic trade-off between "guns and butter" in society?


  Spending on national defense reduces the amount available for consumer goods.
• What is the trade-off between efficiency and equality?


  Efficiency maximizes benefits from resources, while equality distributes benefits uniformly.
• How do government policies affect efficiency and equality?


  Policies aimed at equality can reduce efficiency by altering work incentives.
• What happens when the government redistributes income from the rich to the poor?


  It reduces the reward for hard work, leading to less production of goods and services.
• What is the opportunity cost of an item?


  What you give up to obtain that item.
• Why is the cost of going to college not just the tuition and fees?

  It also includes the opportunity cost of time and potential earnings lost.
• What is the marginal cost of streaming an additional movie if you already pay for a subscription?


  The marginal cost is zero since the subscription fee remains the same regardless of usage.
• What does it mean for rational people to think at the margin?


  They make decisions by comparing marginal benefits and marginal costs.
• Why might an airline sell a ticket for less than the average cost of a seat?


  Because the marginal cost of adding another passenger is very low.
• Why do people pay more for diamonds than for water?


  Diamonds are rare, leading to a higher marginal benefit compared to the plentiful water.
• What is an incentive in economic terms?


  An incentive is something that induces a person to act, such as a reward or punishment.
• How do rational people respond to incentives?


  They make decisions by comparing the costs and benefits associated with the incentives.
• What is the marginal benefit of an extra cup of water for a person?


  Small, because water is plentiful
• Why is the marginal benefit of an extra diamond large?


  Because diamonds are rare
• What does a rational decision maker do regarding marginal benefits and costs?


  They take an action if the marginal benefit exceeds the marginal cost
• How does the principle of marginal thinking explain the use of movie streaming services?


  People use them as long as the marginal benefit exceeds the marginal cost
• Why are airlines willing to sell tickets below average cost?

  Because the marginal benefit of selling an additional ticket exceeds the marginal cost
• What is the central role of incentives in economics?


  Incentives induce people to act by comparing costs and benefits
• What is an incentive?


  Something that induces a person to act
• How do people respond to incentives according to economic principles?


  They alter their behavior based on the costs and benefits presented
• What happens when the price of apples rises?


  People eat fewer apples and orchards hire more workers
• How do public policies affect incentives?


  They change the costs or benefits that people face, altering behavior
• What is the effect of a gasoline tax on consumer behavior?


  It encourages people to drive smaller, more fuel-efficient cars
• What unintended consequences can arise from policies that change incentives?


  They can lead to behaviors that were not anticipated by policymakers
• What was the direct effect of the seat belt law on auto safety?


  It increased the likelihood of surviving an auto accident
• How does the seat belt law affect driver behavior?


  It may lead drivers to drive faster and less carefully
• What did economist Sam Peltzman conclude about auto-safety laws?


  They lead to fewer deaths per accident but more accidents overall