Exam 1: Ten Principles of Economics: Part B

An individual deciding how to allocate her limited time is dealing with both scarcity and trade-offs.

Inflation and unemployment both increase as the money supply increases.

The business cycle refers to fluctuations in economic activity such as employment and production.

Communist countries worked on the premise that government officials were in the best position to allocate the economy's scarce resources.

The opportunity cost of working one hour is the sum of the values you would have received from all other activities you could have done in that hour.

Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff.

With careful planning,we can usually get something that we like without having to give up something else that we like.

The fact that people are willing to pay much more for a diamond,which is not needed for survival,than they are willing to pay for a cup of water,which is needed for survival,is an example of irrational behavior.

Trade can make everyone better off except in the case where one person is better at doing everything.

Trade allows each person to specialize in the activities he or she does best,thus increasing each individual's productivity.

A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.

A marginal change is a small incremental adjustment to an existing plan of action.

Economists study how people make decisions.

Because resources are scarce,a society cannot give all individuals the standard of living to which each aspires.

To say people respond to incentives means that people may alter their decisions when the costs and benefits of an action change.

Equality refers to how the pie is divided,and efficiency refers to the size of the economic pie.

The classic tradeoff between "guns and butter" states that when a society spends more on national defense,it has less to spend on consumer goods to raise the standard of living.

An increase in the marginal cost of an activity necessarily means that people will no longer engage in any of that activity.

Trade with any nation can be mutually beneficial.

Scarcity means that there is less of a good or resource available than people wish to have.