lecture 1

• What is the favorite definition of Economics according to Ben Bernanke?


  Economics is a study of how to improve human happiness and sense of satisfaction in life.
• How does Economics define its focus in a formal way?

  Economics is a social science interested in understanding how individuals, firms, governments, and nations make choices on allocating limited resources to satisfy unlimited wants.
• What are the two main conditions that define Economics?

  Limited resources (scarcity) vs. unlimited wants.
• What are the three fundamental questions of Economics?

  What to produce? How to produce? Who will receive goods and services?
• What is an economic system?

  An economic system is a way of how a society organizes the production and exchange of goods and services as well as the allocation of resources.
• How do societies organize their economies to answer the fundamental economic questions?

  Societies organize their economies in two main ways: a centrally planned economy and a market economy.
• What characterizes a centrally planned economy?

  In a centrally planned economy, the government answers all economic questions.
• What characterizes a market economy?


  In a market economy, the questions of what, how, and who will receive goods and services are answered by the market.
• Who is considered the father of modern economics?

  Adam Smith
• What did Adam Smith's work "The Inquiry into the Nature and Causes of the Wealth of Nations" emphasize?

  It showed the role and advantages of the free market system and indicated that government intervention is a threat to economic growth.
• What does Adam Smith's concept of the "Invisible Hand" illustrate?

  It illustrates how individuals acting in their own interests can inadvertently promote the interests of society as a whole.
• What are the gains from free markets?

  • Promote voluntary exchange
  • Stimulate competition
  • Reward hard work
  • Tend to be more efficient
• What is allocative efficiency?

  Allocative efficiency is the state of the economy where resources are allocated in a way that maximizes the social welfare of society.
• What is productive efficiency?

  Productive efficiency is the state of the economy where resources are allocated to maximize the output of goods and services at the lowest possible cost.
• What are the two main branches of Economics?

  Macroeconomics and Microeconomics.
• What does Macroeconomics focus on?

  Macroeconomics focuses on the behavior of the whole economy.
• What does Microeconomics concentrate on?


  Microeconomics concentrates on the choices of individual consumers and firms.
• What are the four principles of Economics presented in the study material?

  1. Resources are scarce.
  2. The real cost of something is what you must give up to get it (opportunity cost).
  3. “How much?” is a decision at the margin.
  4. People usually take advantage of opportunities to make themselves better off.
• What does the principle of opportunity cost imply?

  Opportunity cost is the real cost of something, which is what you must give up to get it.
• What does a decision at the margin involve?

  A decision at the margin involves making a small adjustment to an existing plan or action, considering additional benefits or costs.
• What is the assumption behind the behavior of individuals in Economics?

  The assumption is that people usually respond to incentives.
• What are the additional principles of Economics related to interaction of choices?

  1. There are gains from trade.
  2. Markets move toward equilibrium.
  3. Resources should be used as efficiently as possible to achieve society’s goals.
  4. Markets usually lead to efficiency.
  5. When markets don’t achieve efficiency, government intervention can improve society’s welfare.
• What is an equilibrium in Economics?

  An equilibrium is an economic situation in which an individual is not motivated to change their behavior as they would not be better off doing something different.
• What happens when a market is efficient?

  When a market is efficient, all opportunities to make people better off are identified and acted upon, without wasting resources.
• What are the principles related to economy-wide interactions?

  10. One person’s spending is another person’s income.

  11. Overall spending sometimes gets out of line with the economy’s productive capacity.

  12. Government policies can change spending.
• How does overall spending affect the economy's productive capacity?

  Spending below the economy’s productive capacity leads to a recession, while spending in excess leads to inflation.
• What are some key terms in Economics mentioned in the study material?

  Individual choice, resource, scarce, opportunity cost, trade-off, marginal decisions, marginal analysis, incentive, interaction, trade, gains from trade, specialization, equilibrium, efficient, equity.
• What is a characteristic of goods and services in economics?

  They cannot provide enough goods or services to satisfy all human material wants and needs.
• Why do goods and services have an opportunity cost?

  Because choosing one option means forgoing the next best alternative.
• Which of the following is NOT a resource in the production of rice?

  Money
• What is the definition of opportunity cost?

  The value of the best alternative forgone in making any choice.
• What happens whenever a choice is made?

  The cost of that choice could be referred to as opportunity cost.
• What are the components of the cost of going to a university?

  Tuition, the cost of housing, the cost of books, and forgone income.
• What does the economic way of thinking involve?

  Making choices at the margin.
• Which scenario demonstrates how people respond to incentives?

  More students major in Economics when they hear that salaries for economists are rising.
• What is the opportunity cost of buying online?

  It is the sum of the shipping charges plus the opportunity cost of your time spent waiting for the book to arrive, minus the cost saving from buying online.
• If Liza buys from the bookstore, what is her cost compared to buying from the first site with 2-day delivery?

  She would pay £65 at the bookstore compared to £63.98 from the first site.
• Why would Liza never buy from the second site?

  Because for each delivery time, she is better off buying the book from the first site.
• What does microeconomics deal with?

  Individual decision makers in the economy.
• What does it mean if resources are "scarce"?

  It means that they cannot satisfy all human wants and needs.