Alexandrea's Econ practice exam A core concepts
The Incentive Principle
People respond to incentives. For example, Mike Ditka's argument about playing without helmets suggests that if players feel more "at risk," they will change their behavior to play more safely.
Scarcity
This is the universal phenomenon where resources are finite and limited, forcing us to make trade-offs
Rationality
The assumption that people make decisions with a purpose to achieve their goals.
The Low-Hanging-Fruit Principle
When increasing production, a society should always start with the resource that has the lowest opportunity cost.
The Optimal Choice
Always occurs where Maraginal Benefit = Marginal cost
When Marginal cost decreases
If the cost of an activity goes down, the Incentive Principle tells us that the optimal choice of that activity will increase.
Surplus
As long as $Marginal Benefit > Marginal Cost for a specific unit, producing that unit increases your total economic surplus.
Attainable vs. Unattainable
Points on or inside the curve are attainable. Points outside the curve are unattainable given current resources.
Efficient vs. Inefficient:
Points on the line are efficient Points inside the line are inefficient because you could produce more of both goods without losing anything.
Capitalism
Characteristics include private ownership, voluntary market decisions, and competition.
Communism
An economic system where the means of production are owned by all people collectively
Karl Marx
19th-century philosopher who wrote Das Kapital and The Communist Manifesto.
Adam Smith
Often called the father of modern economics; focused on market systems.
Law of Supply
All else being equal, if the price of a good increases, the quantity supplied will increase (upward sloping curve)
Reservation Price
The maximum a buyer is willing to pay (on the demand curve) or the minimum a seller is willing to accept (on the supply curve).
Deadweight Loss (DWL)
The loss of total surplus that occurs when the market is not at equilibrium (producing "too little" or "too much").