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Chapter Questions
Positive externalities Benefits of a transaction that are borne by an individual not a party to the transaction. Post hoc, ergo propter hoc A common error in economic theorizing which asserts that because event A preceded event B, that event A caused event B. Principal–agent problem Arises when there are inadequate incentives for agents (managers or workers) to put forth their best efforts for principals (owners or managers). This incentive problem arises because principals, who have a vested interest in the operations of the firm, benefit from the hard work of their agents, while agents who do not have a vested interest prefer leisure. Production efficiency The production by a firm of goods and services at least cost, or the full and productive employment of society’s resources. Pure capitalism Describes economic systems that are characterized by the private ownership of productive resources, the use of markets and prices to allocate goods and services, and little or no government intervention in the economy. Satisficing behavior An alternative to the assumption of profit maximization, satisficing behavior may include maximizing salaries and benefits, maximizing a market share subject to some minimally acceptable (by shareholders) profit level, earning an “adequate” rate of return on investment, and attaining some minimum rate of return on sales, profit, market share, asset growth, and so on. Scarcity Describes the condition in which the availability of resources is insufficient to satisfy the wants and needs of individuals and society. Total economic cost Includes all relevant costs associated with producing a given amount of output. Economic costs include both explicit (out-ofpocket) expenses and implicit (opportunity) costs. Total economic profit Economic profit is the difference between total revenue and total economic costs. Total operating cost Economic cost less normal profit. Total operating profit Economic profit plus normal profit.
CHAPTER QUESTIONS 1.1 Define the concept of scarcity. Explain the significance of this concept in relation to the concept of opportunity cost. Are opportunity cost and sacrifice the same thing? Would you say that a sacrifice represents the cost of a particular decision? 1.2 Explain why the concept of scarcity is central to the study of economics. 1.3 The opportunity cost of any decision includes the value of all relevant sacrifices, both explicit and implicit. Do you agree? Explain.
