List and briefly explain the four principles of individual decision making.
1. People face trade-offs.
When you choose something, your give up something else in the mean time.
People face trade-offs because to get one thing that they like, they usually have to give up another thing they like.
2. The cost of something is what you give up for it.
The thing that you give up when choosing something is defined as the cost of the latter.
The cost of something is what you give up to get it, not just in terms of monetary costs but all opportunity costs.
3. Rational people think at the margin.
Rational people make plan and adjust it by comparing the marginal benefit and marginal cost.
Rational people think at the margin by taking an action if and only if the marginal benefit exceeds the marginal cost.
4. People respond to incentives.
If you want to affect people, you can change something else and make them respond to it.
People respond to incentives because they choose activities by comparing benefits to costs; therefore, a change in these benefits or costs may cause their behavior to change.
List and briefly explain the three principles concerning people's economics interactions.
5. Trade can make everyone better off.
Trade allows specialization which lowers the cost.
Trade can make everyone better off because it allows countries to specialize in what they do best and to enjoy a wider variety of goods and services.
6. Market are usually a good way to organize economic activity.
Market can adjust itself.
Market are usually a good way to organize economic activity because the invisible hand leads markets to desirable outcomes.
7. Government sometimes can improve market outcomes.
We need government to enforce the rules and prevent market failure.
Government can sometimes improve market outcomes because markets may fail to allocate resources efficiently due to an externality or market power.
List and briefly explain the three principles that describe how the economy as a whole works.
8. A country's standard of living depends on its ability to produce goods and services.
Productivity determined living standards of a country.
A country's standard of living depends largely on the productivity of its workers, which in turn depends on the education of its workers and the access its workers have to the necessary tools and technology.
9. Prices rise when the government prints too much money.
Overall increase of prices is caused by growth in the quantity of money.
Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation.
10. Society faces a short-run trade-off between inflation and unemployment.
Inflation results in more hiring in a year or two.
Society faces a short-run trade-off between inflation and unemployment that is only temporary. Policymakers have some short-term ability to exploit this relationship using various policy instruments.
Green - questions
White - my answers
Red - given answers
1. People face trade-offs.
When you choose something, your give up something else in the mean time.
People face trade-offs because to get one thing that they like, they usually have to give up another thing they like.
2. The cost of something is what you give up for it.
The thing that you give up when choosing something is defined as the cost of the latter.
The cost of something is what you give up to get it, not just in terms of monetary costs but all opportunity costs.
3. Rational people think at the margin.
Rational people make plan and adjust it by comparing the marginal benefit and marginal cost.
Rational people think at the margin by taking an action if and only if the marginal benefit exceeds the marginal cost.
4. People respond to incentives.
If you want to affect people, you can change something else and make them respond to it.
People respond to incentives because they choose activities by comparing benefits to costs; therefore, a change in these benefits or costs may cause their behavior to change.
List and briefly explain the three principles concerning people's economics interactions.
5. Trade can make everyone better off.
Trade allows specialization which lowers the cost.
Trade can make everyone better off because it allows countries to specialize in what they do best and to enjoy a wider variety of goods and services.
6. Market are usually a good way to organize economic activity.
Market can adjust itself.
Market are usually a good way to organize economic activity because the invisible hand leads markets to desirable outcomes.
7. Government sometimes can improve market outcomes.
We need government to enforce the rules and prevent market failure.
Government can sometimes improve market outcomes because markets may fail to allocate resources efficiently due to an externality or market power.
List and briefly explain the three principles that describe how the economy as a whole works.
8. A country's standard of living depends on its ability to produce goods and services.
Productivity determined living standards of a country.
A country's standard of living depends largely on the productivity of its workers, which in turn depends on the education of its workers and the access its workers have to the necessary tools and technology.
9. Prices rise when the government prints too much money.
Overall increase of prices is caused by growth in the quantity of money.
Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation.
10. Society faces a short-run trade-off between inflation and unemployment.
Inflation results in more hiring in a year or two.
Society faces a short-run trade-off between inflation and unemployment that is only temporary. Policymakers have some short-term ability to exploit this relationship using various policy instruments.
Green - questions
White - my answers
Red - given answers
