Managerial Economics

• What is the first principle of economics regarding resources?


  Resources are scarce.
• What does scarcity refer to in economics?

  Scarcity refers to the limited nature of society’s resources.
• Why can't society produce all the goods and services people wish to have?

  Because society has limited resources.
• What is economics the study of?

  Economics is the study of how society manages its scarce resources.
• What do economists study regarding individual decisions?

  Economists study how people decide what to buy, how much to work, save, and spend.
• What do economists analyze about firms?

  Economists analyze how firms decide how much to produce and how many workers to hire.
• What does society decide regarding resource allocation?

  Society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs.
• What is the first principle of how people make decisions in economics?

  • Principle 1: People Face Trade-offs
  • To get something we like, we must give up something else we also like.
• What is an example of a trade-off when going to a party before an exam?

  Less time for studying.
• What is a trade-off when working longer hours for more money?

  Less time for leisure.
• What is a trade-off regarding environmental protection?

  Resources could be used to produce consumer goods instead of protecting the environment.
• What are the concepts of efficiency and equality in economics?

  • Efficiency: Society gets the most from its scarce resources.
  • Equality: Prosperity is distributed uniformly among society’s members.
• What is the trade-off when redistributing income for greater equality?

  It reduces the incentive to work and produce, shrinking the size of the economic "pie".
• What is the second principle of economics regarding costs?

  The cost of something is what you give up to get it.
• What do people need to compare when making decisions?

  People need to compare costs with benefits of alternatives, including opportunity costs.
• What is opportunity cost?

  Opportunity cost is whatever must be given up to obtain some item.
• What is the opportunity cost of going to college for a year?

  Tuition, books, and fees plus foregone wages.
• What is the opportunity cost of going to the movies?


  The price of the movie ticket plus the value of the time spent in the theater.
• What is the third principle of economics regarding rational decision-making?

  • Principle 3: Rational People Think at the Margin
  • Rational people systematically and purposefully do the best they can to achieve their objectives.
• How do rational people make decisions?

  They evaluate costs and benefits of marginal changes.
• What are marginal changes?

  Marginal changes are small incremental adjustments to a plan of action.
• What is an example of a marginal decision for cell phone users?

  Making long or frivolous calls when minutes are free at the margin.
• What does a manager consider when deciding to increase output?

  The manager compares the cost of the needed labor and materials to the extra revenue.
• What is the fourth principle of economics regarding incentives?

  • Principle 4: People Respond to Incentives
  • An incentive is something that induces a person to act.
• What happens when gas prices rise?

  Consumers buy more hybrid cars and fewer gas guzzling SUVs.
• What is the effect of increased cigarette taxes on teen smoking?

  Teen smoking falls.
• What is the fifth principle of economics regarding trade?

  • Principle 5: Trade Can Make Everyone Better Off
  • People benefit from trade by buying a greater variety of goods and services at lower cost.
• How do countries benefit from trade and specialization?

  • Countries get a better price abroad for goods they produce.
  • They buy other goods more cheaply from abroad than could be produced at home.
• What is the sixth principle of economics regarding markets?

  • Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
  • A market is a group of buyers and sellers that determines what goods and services to produce.
• What does "organizing economic activity" mean?

  It means determining what goods and services to produce, how much of each to produce, and who produced and consumed these.
• How does a market economy allocate resources?

  • Through decentralized decisions of many firms and households as they interact in markets.
• Who provided the famous insight about the "invisible hand" in economics?

  Adam Smith.
• What does the "invisible hand" refer to in economics?

  It refers to prices guiding self-interested households and firms to make decisions that maximize society’s economic well-being.
• How are prices determined in a market?

  Prices are determined by the interaction of buyers and sellers.
• What do prices reflect in a market economy?

  Prices reflect the good’s value to buyers and the cost of producing the good.
• What is the seventh principle of economics regarding government intervention?

  • Principle 7: Governments Can Sometimes Improve Market Outcomes
  • Governments enforce property rights and promote efficiency and equality.
• Why is it important for the government to enforce property rights?

  Because people are less inclined to work, produce, invest, or purchase if there is a large risk of their property being stolen.
• How does the government promote efficiency in the market?

  By avoiding market failures, which occur when the market fails to allocate resources efficiently.
• What is an externality in economics?

  An externality is when the production or consumption of a good affects bystanders, such as pollution.
• What is market power in the context of market failure?

  Market power occurs when a single buyer or seller has substantial influence on market price, such as in a monopoly.