HOMEWORK 1 – BUSINESS ECONOMICS
Question: Key words definition
Trade-offs: resources are scarce, so trade-offs are a basic fact of life.
Incentives: in making choices, decision makers respond to incentives.
Exchange: people benefit from voluntary exchange, and in market economies, market exchanges lead to the efficient use of resources.
Information: the structure that markets take and how well they can function depend critically on the information available to decision makers.
Distribution: markets determine how the goods and services produced by the economy are allocated to members of society.
Scarcity means that trade-offs are a basic fact of life. market economy is an economy in which decisions regarding investment, production and distribution are based on supply and demand and the prices of goods and services are determined in a free price system
The product market: the markets in which firms sell the goods they produce.
The labor market: the market in which households sell labor services and firms buy labor services.
The capital market: the market in which funds are borrowed and lent.
Capital goods are machines and buildings
Microeconomics: focuses on the decisions of households and firms and the detailed study of prices and production in specific industries.
Macroeconomics: focuses on the behavior of the economy as a whole and the behavior of aggregate variables such as overall employment, output, economic growth, the price level, and inflation.
Theory consists of a set of assumptions (or hypotheses) and conclusions derived from those assumptions
Correlation: When two (or more events) occur at about the same time. Correlation should not be confused with causation, in which one event causes the other event. Causation requires correlation, but correlation does not imply causation
Positive economics is the study of how the economy works. Disagreements in positive economics center on the appropriate model of the economy or market and the quantitative magnitudes characterizing the models.
Normative economics deals with the desirability of various actions. Disagreements in normative economics center on differences in the values placed on the various costs and benefits of different actions.
Question: Why are trades-offs unavoidable? Why are incentives important in understanding choices?
By their definition as basic fact of life, they are unavoidable. Incentives are basic human nature, so they participate in making a choice.
Question: After a voluntary exchange, why are both parties better off?
Voluntary exchange makes every party able to get what they need for a less amount of money.
Question: What is a mixed economy? Describe some of the roles government might play, or not play, in a mixed economy.
An economic system in which both the private enterprise and a degree of state monopoly (usually in public services, defense, infrastructure, and basic industries) coexist. All modern economies are mixed where the means of production are shared between the private and public sectors.
Here are some roles government could play: 1. Provide a stable currency for the TFM principles to be negotiated in 2. Provide a dependable, independent, consistent legal/judicial system for the proper resolution of disputes arising from economic activity (in TFM terms, something to enforce contracts and resolve contract disputes) 3. Produce a legal framework where a society can define what economic activity it considers acceptable behavior. 4. Provide a legal enforcement mechanism to both detect violations of #3, and to deter/punish/reform entities from such violations (generally, using #2).
Question: Name the three main economic markets, and describe how an individual might participate in each one as a buyer or a seller
The three main economic markets are:
1. The product market: the markets in which firms sell the goods they produce.
2. The labor market: the