j Cj hj aj pj tj ej r
1 WHAT IS ECONOMIC
S?
j j
A n s jwje r s j t o j t h e j R e jv i e jwj Q u i z z jejs
Pagej2
1. Listjsomejexamplesjofjthejscarcityjthatjyoujface.
Examplesjofjscarcityjcommonjtojstudentsjincludejnotjenoughjincomejtojaffordjbothjtuitionjandjaj
car,jnotjenoughjlearningjcapacityjtojstudyjforjbothjanjeconomicsjexamjandjajchemistryjexamjinj
onejnight,jandjnotjenoughjtimejtojallowjextensivejstudyingjandjextensivejsocializing.
2. Findjexamplesjofjscarcityjinjtoday’sjheadlines.
AjheadlinejinjthejNationaljPostjonjMayj5,j2014jwasj“PorterjAirlinesjtojchargejpassengersjfirstjba
gjfeejstartingjMayj14.”jPorterjAirlinesjplansjtojchargejbetweenj$25jandj$28.25jforjthejfirstjcheck
edjbag.jScarcityjisjourjinabilityjtojsatisfyjalljourjwants.jWithjthejbagjfee,jajpassengerjfacesjscarci
tyjbecausejshejhasjlessjmoneyjtojsatisfyjotherjwants.jWithoutjthejfee,jPorterjAirlinesjfacesjscar
cityjbecausejitjwilljbejunablejtojofferjotherjservices.
3. Findjanjexamplejofjthejdistinctionjbetweenjmicroeconomicsjandj
macroeconomicsjinjtoday’sjheadlines.
Microeconomics:jOnjMayj5,j2014,jajheadlinejinjthejNationaljPostjwasj“Checkjyourjgambling:jC
anadiansjbettingj$210-
millionjonjNHLjplayoffs.”jThisjstoryjcoversjajmicroeconomicjtopicjbecausejitjdiscussesjchoicesj
madejbyjindividualsjandjtheirjgamblingjresponsesjtojthejNHLjplayoffs.
Macroeconomics:jOnjMayj5,j2014,jajheadlinejinjthejNationaljPostjwasj“Canadianjdollarjseenjsli
dingjbelowj80₵jbyjMarkjCarney’sjprotégé.”jThisjstoryjcoversjajmacroeconomicjtopicjbecausejitjc
oncernsjthejeffectjofjthejCanadianjandjworldjeconomyjonjthejCanadianjdollar.
Pagej7
1. Describejthejbroadjfactsjaboutjwhat,jhow,jandjforjwhomjgoodsjandjservicesjarejpr
oduced.
Whatjwejproducejvariesjoverjtime.jInjCanadajtoday,jservicesjaccountjforj78jpercentjofjproducti
on,jmanufacturedjgoodsjforj20jpercent,jandjagriculturejforj2jpercent.jWhatjwejproducejalsojvari
esjoverjcountries.jAgriculturejandjmanufacturingjarejsmalljpercentagesjofjproductionjinjrichjcou
ntriesjandjlargejpercentagesjofjproductionjinjpoorerjcountries.
Howjgoodsjandjservicesjarejproducedjisjbyjbusinessesjdeterminingjhowjthejfactorsjofjproductio
n,jland,jlabour,jcapital,jandjentrepreneurship,jarejcombinedjtojmakejthejgoodsjandjservicesjwej
consume.jLandjincludesjalljnaturaljresources,jbothjrenewablejnaturaljresourcesjsuchjasjwood,j
andjnonrenewablejnaturaljresourcesjsuchjasjnaturaljgas.jThejqualityjofjlabourjdependsjonjhum
anjcapital.jInjCanadajinj2013,j25.3jpercentjofjthejadultjpopulationjhadjajuniversityjdegree,jajfurt
herj39jpercentjhadjsomejpost-
secondaryjeducation,jandj93.6jpercentjhadjcompletedjhighjschool.
Copyrightj©j2016jPearsonjCanadajInc.
,2 C H A P T E jRj 1
Forjwhomjgoodsjandjservicesjarejproducedjdependsjonjthejincomesjthatjpeoplejearn.jPeoplejwi
thjlargejincomesjcanjbuyjajwidejrangejofjgoodsjandjservices.jPeoplejwithjsmalljincomesjcanjaffo
rdjajsmallerjrangejofjgoodsjandjservices.
2. Usejheadlinesjfromjthejrecentjnewsjtojillustratejthejpotentialjforjconflictjbetweenjse
lf-interestjandjthejsocialjinterest.
Onejexamplejofjanjissuejthatjillustratesjthejpotentialjforjconflictjbetweenjself-
interestjandjthejsocialjinterestjisjthejproposedjKeystonejPipeline.jInjthejNationaljPostjonjMayj5,j
2014,jthejheadlinej“KeystonejXLjPipelinejdelaysjthreateningjhundredsjofjTransCanadajjobs,jC
EOjRussjGurlingjsays”jappears.jThejpotentialjforjconflictjexistsjbetweenjthejself-
interestjofjthejpotentialjworkersjwhosejemploymentjisjbeingjdelayedjandjthejsocialjinterestjofjtho
sejconcernedjaboutjthejenvironment.
Pagej10
1. Explainjthejideajofjajtradeoffjandjthinkjofjthreejtradeoffsjthatjyoujhavejmadejto
day.
Ajtradeoffjisjanjexchange—
givingjupjonejthingjtojgetjsomethingjelse.jWhatjisjgivenjupjisjthejopportunityjcostjofjwhateverjisjo
btained.jThreejexamplesjofjtradeoffsjare:ja)jWhenjajstudentjsleepsjinjratherjthanjgoingjtojhisjear
lyjmorningjeconomicsjclass,jthejstudentjtradesj additionaljsleepjforjstudyjtime.jThejopportunityjc
ostjofjthejdecisionjisjajlowerjgradejonjthejexam.jb)jWhenjajstudentjrunningjlatejforjclassjparksjhe
rjcarjillegally,jthejstudentjtradesjsavingjtimejforjthejriskjofjajticket.jThejpotentialjopportunityjcostjo
fjthejdecisionjisjthejgoodsjandjservicesjthatjcannotjbejpurchasedjifjthejstudentjreceivesjanjexpe
nsivejparkingjticket.jc)jAjstudentjtradesjhigherjincomejbyjspendingjtimejduringjthejdayjworkingjat
jajpart-
timejjobjforjlessjtimejspentjatjleisurejtimejandjstudy.jThejopportunityjcostjofjthejhigherjincomejisjl
essjleisurejandjlowerjgradesjinjclasses.
2. Explainjwhatjeconomistsjmeanjbyjrationaljchoicejandjthinkjofjthreejchoicesjthatjyo
u’vejmadejtodayjthatjarejrational.
Ajrationaljchoicejisjonejthatjcomparesjthejcostsjandjbenefitsjandjachievesjthejgreatestjbenefitjo
verjcostjforjthejpersonjmakingjthejchoice.jThreejrationaljchoicesjare:ja)jThejchoicejtojskipjbreak
fastjtojgojtojclass.jInjthisjcasejthejbenefitjisjthejhigherjgradejinjthejclassjandjthejcostjisjthejbreakf
astjforgone.jb)jThejchoicejtojstopjtalkingjwithjajfriendjonjthejphonejandjstartjstudyingjforjanjimpe
ndingjexam.jInjthisjcasejthejbenefitjisjthejresultingjhigherjgradejinjthejclassjandjthejcostjisjthejco
nversationjforgone.jc)jThejchoicejtojdojlaundryjtodayjratherjthanjwatchjtelevision.jInjthisjcasejth
ejbenefitjisjcleanjclothesjtojwearjandjthejcostjisjthejlossjofjthejentertainmentjthejtelevisionjshowj
wouldjhavejprovided.
3. Explainjwhyjopportunityjcostjisjthejbestjforgonejalternativejandjprovideje
xamplesjofjsomejopportunityjcostsjthatjyoujhavejfacedjtoday.
Whenjajdecisionjtojundertakejonejactivityjisjmade,joftenjmanyjalternativejactivitiesjarejnojlonger
jpossible.jOftenjthesejactivitiesjarejmutuallyjexclusivejsojonlyjthejhighest-
valuedjalternativejisjactuallyjforgone.jForjinstance,jthejdecisionjtojgojtojajstudent’sj8:30jAMjclas
sjeliminatesjthejpossibilityjofjsleepingjinjduringjthejhourjandjofjjoggingjduringjthejhour.jButjinjthisj
case,jitjisjimpossiblejtojbothjsleepjinjandjtojjogjduringjthejhour,jsojthejopportunityjcostj ofjattendi
ngjclassjcannotjbejbothjactivities.jThejopportunityjcostjofjattendingjclassjisjonlyjthejactivityjthatjo
therwisejwouldjhavejbeenjchosen—eitherjsleepingjinjorjjogging—
whateverjactivityjisjthejmostjhighlyjvaluedjofjthejforgonejalternatives.
Copyrightj©j2016jPearsonjCanadajInc.
, WjHjAjTj IS j EjCjO N O M I C S ? j 3
4. Explainjwhatjitjmeansjtojchoosejatjthejmarginjandjillustratejwithjthreejchoicesjatjth
ejmarginjthatjyoujhavejmadejtoday.
Choosingjatjthejmarginjmeansjchoosingjtojdojajlittlejmorejorjajlittlejlessjofjsomejactivity.jThreejexampl
esjare:ja)jWhenjajstudentjfacesjajchemistryjandjanjeconomicsjfinaljexamjinjonejday,jthejstudentjmustj
determinejwhetherjspendingjthejlastjhourjstudyingjajlittlejmorejchemistryjorjajlittlejmorejeconomicsjwill
jyieldjajbetterjcontributionj(marginaljbenefit)jtojhisjoveralljGPA.j b)jAjstudentjbuyingjajcomputerjmustjd
ecidejwhetherjthejmarginaljbenefitjofjaddingj1jGBjofjadditionaljmemoryjisjworthjthejmarginaljcostjofjth
ejadditionaljmemory.j c)jAjstudentjfootballjfanjwithjajchoicejofjajcheapjseatjinjthejstudentjbleachersjloc
atedjatjthejfarjendjofjthejplayingjfieldjorjajmorejexpensivejseatjlocatedjonjthej30jyardjlinejmustjdetermi
nejwhetherjthejmarginaljbenefitjofjwatchingjthejgamejfromjajbetterjseatjisjworthjthejmarginaljcostjofjth
ejhigherjticketjprice.
5. Explainjwhyjchoicesjrespondjtojincentivesjandjthinkjofjthreejincentivesjtojwhichjyo
ujhavejrespondedjtoday.
Peoplejmakingjrationaljdecisionsjcomparejthejmarginaljbenefitjfromjanjactionjtojitsjmarginaljcost.jAjpe
rson’sjchoicejchangesjwhenjthejincentive—
thejmarginaljbenefitjorjthejmarginaljcostjchanges.jExamplesjofjincentivesjare:ja)jAjstudentjstudiesjbec
ausejofjthejincentivesjofferedjbyjgrades.jb)jAjstudentjisjmorejlikelyjtojattendjajclassjifjattendancejisjfact
oredjintojthejgrade.jc)jAjstudentjmightjattendjajmeetingjofjajclubjifjthejstudent’sjsignificantjotherjisjeag
erjtojattendjthejmeeting.
Pagej11
1. Distinguishjbetweenjajpositivejstatementjandjajnormativejstatementjandjprovideje
xamples.
Ajpositivejstatementjisjaboutjwhatjis.jItjisjtestable.jAjnormativejstatementjaboutjwhatjoughtjtojbe.jItjisjn
otjtestablejbecausejtherejisjnojuniversallyjapprovedjcriterionjbyjwhichjthejstatementjcanjbejjudged.j“Ij
willjreceivejanjAjforjthisjcourse,”jisjajpositivejstatementjmadejbyjanjeconomicsj student—
itjmightjnotjbejtrue,jbutjitjisjtestable.j“Ijwilljreceivejajgoodjgradejforjthisjcourse,”jisjajnormativejstatemen
t.jWhetherjsomeonejagreesjwithjitjdependsjonjhisjinterpretationjofjwhatjmakesjforjaj“good”jgrade.
2. Whatjisjajmodel?jCanjyoujthinkjofjajmodeljthatjyoujmightjusejinjyourjeverydayjlife
?
Ajmodeljisjajdescriptionjofjsomejaspectjofjthejworld.jAnjeconomicjmodeljisjajdescriptionjofjsomejaspe
ctjofjthejeconomicjworldjthatjincludesjonlyjthosejfeaturesjthatjarejneededjforjthejpurposejatjhand.jAnje
xamplejofjajmodeljisjajGPSjmap.jItjreflectsjonlyjthosejaspectsjofjthejrealjworldjthatjarejrelevantjtojtheju
serjinjreachingjherjdestinationjandjavoidsjinformationjirrelevantjtojtravel.
3. Howjdojeconomistsjtryjtojdisentanglejcausejandjeffect?
Economistsjdisentanglejcausejandjeffectjbyjusingjnaturaljexperimentsj(situationsjinjthejordinaryjcour
sejofjeconomicjlifejinjwhichjthejonejfactorjofjinterestjisjdifferentjandjotherjthingsjarejequaljorjsimilar);jc
onductingjstatisticaljinvestigationsjtojfindjcorrelations;jandjperformingjeconomicjexperimentsjbyjputtin
gjpeoplejinjdecision-
makingjsituationsjandjvaryingjthejinfluencejofjonejfactorjatjajtimejtojdiscoverjhowjtheyjrespond.
4. Howjisjeconomicsjusedjasjajpolicyjtool?
Individuals,jbusinesses,jandjgovernmentsjusejeconomicsjasjajpolicyjtool.jIndividualsjusejthejeconomi
cjideasjofjmarginaljbenefitjandjmarginaljcostjwhenjmakingjdecisionsjforjsuchjtopicsjasjattendingjcolleg
e,jpayingjcashjorjcreditjforjajpurchase,jandjworking.jBusinessesjalsojusejthejconceptsjofjmarginaljben
efitjandjmarginaljcostjwhenjmakingjdecisionsjaboutjwhatjtojproduce,jhowjtojproduce,jandjhowjmanyjho
ursjtojstayjopen.jGovernmentsjusejmarginaljbenefitjandjmarginaljcostjwhenjdecidingjissuesjsuchjasjth
ejleveljofjpropertyjtaxes,jthejamountjtojfundjhigherjeducation,jorjthejleveljofjajtariffjonjEUjimports.
Copyrightj©j2016jPearsonjCanadajInc.
, 4 C H A P T E jRj 1
A n s w e r s j to j the j S tudy j Plan j P r o b l e m s j and j Ap p l i c a t i o n s j
1. ApplejInc.jdecidesjtojmakejiTunesjfreelyjavailablejinjunlimitedjquantities.
a. DoesjApple’sjdecisionjchangejthejincentivesjthatjpeoplejface?
Apple’sjdecisionjchangesjpeople’sjincentives.jForjexample,jitjincreasesjthejincentivejtojbuyjanji
Podjtojtakejadvantagejofjthejnewlyj“free”jmusicjavailablejonjiTunes.
b. IsjApple’sjdecisionjanjexamplejofjajmicroeconomicjorjajmacroeconomicjissue?jApple’sjd
ecisionjisjajmicroeconomicjissuejbecausejitjaffectsjajsinglejcompanyjandjajsinglejmarket.
2. Whichjofjthejfollowingjpairsjdoesjnotjmatch?
a. Labourjandjwages
Labourjearnsjwages,jsojthisjpairjmatches.
b. Landjandjrent
Landjearnsjrent,jsojthisjpairjmatches.
c. Entrepreneurshipjandjprofit
Entrepreneurshipjearnsjprofit,jsojthisjpairjmatches.
d. Capitaljandjprofit
Capitaljearnsjinterest,jsojthisjpairjdoesjnotjmatch.
3. Explainjhowjthejfollowingjnewsjheadlinesjconcernjself-
interestjandjthejsocialjinterest.
a. StarbucksjExpandsjinjChina
Starbucks’jexpansionjisjajdecisionjmadejbyjStarbucksjtojfurtherjStarbucks’jinterest.jThejdecisio
njisjdirectlyjinjStarbucks’jself-
interest.jThejsocialjinterestjisjaffectedjbecausejStarbucks’jexpansionjwilljhavejanjeffectjinjChina
.jForjexample,jmorejChinesejmightjdrinkjcoffeejratherjthanjteajandjfewerjcoffeejshopsjrunjbyjChi
nesejfirmsjmightjopen.
b. McDonald’sjMovesjintojGourmetjCoffee
McDonald’sjdecisionjtojservejgourmetjcoffeejisjajdecisionjmadejbyjMcDonald’sjtojfurtherjMcDo
nald’sjinterest.jThejdecisionjisjdirectlyjinjMcDonald’sjself-
interest.jThejsocialjinterestjisjaffectedjbecausejmorejpeoplejwilljdrinkjcoffeejratherjthanjotherjdri
nksjsuchjasjtea.
c. FoodjMustjBejLabelledjwithjNutritionjData
Thejdecisionjtojrequirejthatjfoodjmustjbejlabelledjwithjnutritionjinformationjisjmadejinjthejsocialj
interest.jThisjdecisionjisjnotjmadejbyjanyjonejsinglejfirmjandjsojdoesjnotj(necessarily)jreflectja
nyone’sjself-interest.
4. Thejnightjbeforejanjeconomicsjtest,jyoujdecidejtojgojtojthejmoviesjinsteadjofjsta
yingjhomejandjworkingjyourjMyEconLabjStudyjPlan.jYoujgetj50jpercentjonjyourjt
estjcomparedjwithjthej70jpercentjthatjyoujnormallyjscore.
a. Didjyoujfacejajtradeoff?
Yes,jyoujfacedjajtradeoff.jThejtradeoffjwasjbetweenjajhigherjtestjscorejandjanjeveningjwithjyourj
friendsjatjthejmovies.
b. Whatjwasjthejopportunityjcostjofjyourjeveningjatjthejmovies?
Thejopportunityjcostjofjgoingjtojthejmoviesjisjthejfalljinjyourjgrade.jThatjisjthej20jpointsjforgonejfr
omjchoosingjtojseejthejmoviejratherjthanjstudy.
Copyrightj©j2016jPearsonjCanadajInc.
1 WHAT IS ECONOMIC
S?
j j
A n s jwje r s j t o j t h e j R e jv i e jwj Q u i z z jejs
Pagej2
1. Listjsomejexamplesjofjthejscarcityjthatjyoujface.
Examplesjofjscarcityjcommonjtojstudentsjincludejnotjenoughjincomejtojaffordjbothjtuitionjandjaj
car,jnotjenoughjlearningjcapacityjtojstudyjforjbothjanjeconomicsjexamjandjajchemistryjexamjinj
onejnight,jandjnotjenoughjtimejtojallowjextensivejstudyingjandjextensivejsocializing.
2. Findjexamplesjofjscarcityjinjtoday’sjheadlines.
AjheadlinejinjthejNationaljPostjonjMayj5,j2014jwasj“PorterjAirlinesjtojchargejpassengersjfirstjba
gjfeejstartingjMayj14.”jPorterjAirlinesjplansjtojchargejbetweenj$25jandj$28.25jforjthejfirstjcheck
edjbag.jScarcityjisjourjinabilityjtojsatisfyjalljourjwants.jWithjthejbagjfee,jajpassengerjfacesjscarci
tyjbecausejshejhasjlessjmoneyjtojsatisfyjotherjwants.jWithoutjthejfee,jPorterjAirlinesjfacesjscar
cityjbecausejitjwilljbejunablejtojofferjotherjservices.
3. Findjanjexamplejofjthejdistinctionjbetweenjmicroeconomicsjandj
macroeconomicsjinjtoday’sjheadlines.
Microeconomics:jOnjMayj5,j2014,jajheadlinejinjthejNationaljPostjwasj“Checkjyourjgambling:jC
anadiansjbettingj$210-
millionjonjNHLjplayoffs.”jThisjstoryjcoversjajmicroeconomicjtopicjbecausejitjdiscussesjchoicesj
madejbyjindividualsjandjtheirjgamblingjresponsesjtojthejNHLjplayoffs.
Macroeconomics:jOnjMayj5,j2014,jajheadlinejinjthejNationaljPostjwasj“Canadianjdollarjseenjsli
dingjbelowj80₵jbyjMarkjCarney’sjprotégé.”jThisjstoryjcoversjajmacroeconomicjtopicjbecausejitjc
oncernsjthejeffectjofjthejCanadianjandjworldjeconomyjonjthejCanadianjdollar.
Pagej7
1. Describejthejbroadjfactsjaboutjwhat,jhow,jandjforjwhomjgoodsjandjservicesjarejpr
oduced.
Whatjwejproducejvariesjoverjtime.jInjCanadajtoday,jservicesjaccountjforj78jpercentjofjproducti
on,jmanufacturedjgoodsjforj20jpercent,jandjagriculturejforj2jpercent.jWhatjwejproducejalsojvari
esjoverjcountries.jAgriculturejandjmanufacturingjarejsmalljpercentagesjofjproductionjinjrichjcou
ntriesjandjlargejpercentagesjofjproductionjinjpoorerjcountries.
Howjgoodsjandjservicesjarejproducedjisjbyjbusinessesjdeterminingjhowjthejfactorsjofjproductio
n,jland,jlabour,jcapital,jandjentrepreneurship,jarejcombinedjtojmakejthejgoodsjandjservicesjwej
consume.jLandjincludesjalljnaturaljresources,jbothjrenewablejnaturaljresourcesjsuchjasjwood,j
andjnonrenewablejnaturaljresourcesjsuchjasjnaturaljgas.jThejqualityjofjlabourjdependsjonjhum
anjcapital.jInjCanadajinj2013,j25.3jpercentjofjthejadultjpopulationjhadjajuniversityjdegree,jajfurt
herj39jpercentjhadjsomejpost-
secondaryjeducation,jandj93.6jpercentjhadjcompletedjhighjschool.
Copyrightj©j2016jPearsonjCanadajInc.
,2 C H A P T E jRj 1
Forjwhomjgoodsjandjservicesjarejproducedjdependsjonjthejincomesjthatjpeoplejearn.jPeoplejwi
thjlargejincomesjcanjbuyjajwidejrangejofjgoodsjandjservices.jPeoplejwithjsmalljincomesjcanjaffo
rdjajsmallerjrangejofjgoodsjandjservices.
2. Usejheadlinesjfromjthejrecentjnewsjtojillustratejthejpotentialjforjconflictjbetweenjse
lf-interestjandjthejsocialjinterest.
Onejexamplejofjanjissuejthatjillustratesjthejpotentialjforjconflictjbetweenjself-
interestjandjthejsocialjinterestjisjthejproposedjKeystonejPipeline.jInjthejNationaljPostjonjMayj5,j
2014,jthejheadlinej“KeystonejXLjPipelinejdelaysjthreateningjhundredsjofjTransCanadajjobs,jC
EOjRussjGurlingjsays”jappears.jThejpotentialjforjconflictjexistsjbetweenjthejself-
interestjofjthejpotentialjworkersjwhosejemploymentjisjbeingjdelayedjandjthejsocialjinterestjofjtho
sejconcernedjaboutjthejenvironment.
Pagej10
1. Explainjthejideajofjajtradeoffjandjthinkjofjthreejtradeoffsjthatjyoujhavejmadejto
day.
Ajtradeoffjisjanjexchange—
givingjupjonejthingjtojgetjsomethingjelse.jWhatjisjgivenjupjisjthejopportunityjcostjofjwhateverjisjo
btained.jThreejexamplesjofjtradeoffsjare:ja)jWhenjajstudentjsleepsjinjratherjthanjgoingjtojhisjear
lyjmorningjeconomicsjclass,jthejstudentjtradesj additionaljsleepjforjstudyjtime.jThejopportunityjc
ostjofjthejdecisionjisjajlowerjgradejonjthejexam.jb)jWhenjajstudentjrunningjlatejforjclassjparksjhe
rjcarjillegally,jthejstudentjtradesjsavingjtimejforjthejriskjofjajticket.jThejpotentialjopportunityjcostjo
fjthejdecisionjisjthejgoodsjandjservicesjthatjcannotjbejpurchasedjifjthejstudentjreceivesjanjexpe
nsivejparkingjticket.jc)jAjstudentjtradesjhigherjincomejbyjspendingjtimejduringjthejdayjworkingjat
jajpart-
timejjobjforjlessjtimejspentjatjleisurejtimejandjstudy.jThejopportunityjcostjofjthejhigherjincomejisjl
essjleisurejandjlowerjgradesjinjclasses.
2. Explainjwhatjeconomistsjmeanjbyjrationaljchoicejandjthinkjofjthreejchoicesjthatjyo
u’vejmadejtodayjthatjarejrational.
Ajrationaljchoicejisjonejthatjcomparesjthejcostsjandjbenefitsjandjachievesjthejgreatestjbenefitjo
verjcostjforjthejpersonjmakingjthejchoice.jThreejrationaljchoicesjare:ja)jThejchoicejtojskipjbreak
fastjtojgojtojclass.jInjthisjcasejthejbenefitjisjthejhigherjgradejinjthejclassjandjthejcostjisjthejbreakf
astjforgone.jb)jThejchoicejtojstopjtalkingjwithjajfriendjonjthejphonejandjstartjstudyingjforjanjimpe
ndingjexam.jInjthisjcasejthejbenefitjisjthejresultingjhigherjgradejinjthejclassjandjthejcostjisjthejco
nversationjforgone.jc)jThejchoicejtojdojlaundryjtodayjratherjthanjwatchjtelevision.jInjthisjcasejth
ejbenefitjisjcleanjclothesjtojwearjandjthejcostjisjthejlossjofjthejentertainmentjthejtelevisionjshowj
wouldjhavejprovided.
3. Explainjwhyjopportunityjcostjisjthejbestjforgonejalternativejandjprovideje
xamplesjofjsomejopportunityjcostsjthatjyoujhavejfacedjtoday.
Whenjajdecisionjtojundertakejonejactivityjisjmade,joftenjmanyjalternativejactivitiesjarejnojlonger
jpossible.jOftenjthesejactivitiesjarejmutuallyjexclusivejsojonlyjthejhighest-
valuedjalternativejisjactuallyjforgone.jForjinstance,jthejdecisionjtojgojtojajstudent’sj8:30jAMjclas
sjeliminatesjthejpossibilityjofjsleepingjinjduringjthejhourjandjofjjoggingjduringjthejhour.jButjinjthisj
case,jitjisjimpossiblejtojbothjsleepjinjandjtojjogjduringjthejhour,jsojthejopportunityjcostj ofjattendi
ngjclassjcannotjbejbothjactivities.jThejopportunityjcostjofjattendingjclassjisjonlyjthejactivityjthatjo
therwisejwouldjhavejbeenjchosen—eitherjsleepingjinjorjjogging—
whateverjactivityjisjthejmostjhighlyjvaluedjofjthejforgonejalternatives.
Copyrightj©j2016jPearsonjCanadajInc.
, WjHjAjTj IS j EjCjO N O M I C S ? j 3
4. Explainjwhatjitjmeansjtojchoosejatjthejmarginjandjillustratejwithjthreejchoicesjatjth
ejmarginjthatjyoujhavejmadejtoday.
Choosingjatjthejmarginjmeansjchoosingjtojdojajlittlejmorejorjajlittlejlessjofjsomejactivity.jThreejexampl
esjare:ja)jWhenjajstudentjfacesjajchemistryjandjanjeconomicsjfinaljexamjinjonejday,jthejstudentjmustj
determinejwhetherjspendingjthejlastjhourjstudyingjajlittlejmorejchemistryjorjajlittlejmorejeconomicsjwill
jyieldjajbetterjcontributionj(marginaljbenefit)jtojhisjoveralljGPA.j b)jAjstudentjbuyingjajcomputerjmustjd
ecidejwhetherjthejmarginaljbenefitjofjaddingj1jGBjofjadditionaljmemoryjisjworthjthejmarginaljcostjofjth
ejadditionaljmemory.j c)jAjstudentjfootballjfanjwithjajchoicejofjajcheapjseatjinjthejstudentjbleachersjloc
atedjatjthejfarjendjofjthejplayingjfieldjorjajmorejexpensivejseatjlocatedjonjthej30jyardjlinejmustjdetermi
nejwhetherjthejmarginaljbenefitjofjwatchingjthejgamejfromjajbetterjseatjisjworthjthejmarginaljcostjofjth
ejhigherjticketjprice.
5. Explainjwhyjchoicesjrespondjtojincentivesjandjthinkjofjthreejincentivesjtojwhichjyo
ujhavejrespondedjtoday.
Peoplejmakingjrationaljdecisionsjcomparejthejmarginaljbenefitjfromjanjactionjtojitsjmarginaljcost.jAjpe
rson’sjchoicejchangesjwhenjthejincentive—
thejmarginaljbenefitjorjthejmarginaljcostjchanges.jExamplesjofjincentivesjare:ja)jAjstudentjstudiesjbec
ausejofjthejincentivesjofferedjbyjgrades.jb)jAjstudentjisjmorejlikelyjtojattendjajclassjifjattendancejisjfact
oredjintojthejgrade.jc)jAjstudentjmightjattendjajmeetingjofjajclubjifjthejstudent’sjsignificantjotherjisjeag
erjtojattendjthejmeeting.
Pagej11
1. Distinguishjbetweenjajpositivejstatementjandjajnormativejstatementjandjprovideje
xamples.
Ajpositivejstatementjisjaboutjwhatjis.jItjisjtestable.jAjnormativejstatementjaboutjwhatjoughtjtojbe.jItjisjn
otjtestablejbecausejtherejisjnojuniversallyjapprovedjcriterionjbyjwhichjthejstatementjcanjbejjudged.j“Ij
willjreceivejanjAjforjthisjcourse,”jisjajpositivejstatementjmadejbyjanjeconomicsj student—
itjmightjnotjbejtrue,jbutjitjisjtestable.j“Ijwilljreceivejajgoodjgradejforjthisjcourse,”jisjajnormativejstatemen
t.jWhetherjsomeonejagreesjwithjitjdependsjonjhisjinterpretationjofjwhatjmakesjforjaj“good”jgrade.
2. Whatjisjajmodel?jCanjyoujthinkjofjajmodeljthatjyoujmightjusejinjyourjeverydayjlife
?
Ajmodeljisjajdescriptionjofjsomejaspectjofjthejworld.jAnjeconomicjmodeljisjajdescriptionjofjsomejaspe
ctjofjthejeconomicjworldjthatjincludesjonlyjthosejfeaturesjthatjarejneededjforjthejpurposejatjhand.jAnje
xamplejofjajmodeljisjajGPSjmap.jItjreflectsjonlyjthosejaspectsjofjthejrealjworldjthatjarejrelevantjtojtheju
serjinjreachingjherjdestinationjandjavoidsjinformationjirrelevantjtojtravel.
3. Howjdojeconomistsjtryjtojdisentanglejcausejandjeffect?
Economistsjdisentanglejcausejandjeffectjbyjusingjnaturaljexperimentsj(situationsjinjthejordinaryjcour
sejofjeconomicjlifejinjwhichjthejonejfactorjofjinterestjisjdifferentjandjotherjthingsjarejequaljorjsimilar);jc
onductingjstatisticaljinvestigationsjtojfindjcorrelations;jandjperformingjeconomicjexperimentsjbyjputtin
gjpeoplejinjdecision-
makingjsituationsjandjvaryingjthejinfluencejofjonejfactorjatjajtimejtojdiscoverjhowjtheyjrespond.
4. Howjisjeconomicsjusedjasjajpolicyjtool?
Individuals,jbusinesses,jandjgovernmentsjusejeconomicsjasjajpolicyjtool.jIndividualsjusejthejeconomi
cjideasjofjmarginaljbenefitjandjmarginaljcostjwhenjmakingjdecisionsjforjsuchjtopicsjasjattendingjcolleg
e,jpayingjcashjorjcreditjforjajpurchase,jandjworking.jBusinessesjalsojusejthejconceptsjofjmarginaljben
efitjandjmarginaljcostjwhenjmakingjdecisionsjaboutjwhatjtojproduce,jhowjtojproduce,jandjhowjmanyjho
ursjtojstayjopen.jGovernmentsjusejmarginaljbenefitjandjmarginaljcostjwhenjdecidingjissuesjsuchjasjth
ejleveljofjpropertyjtaxes,jthejamountjtojfundjhigherjeducation,jorjthejleveljofjajtariffjonjEUjimports.
Copyrightj©j2016jPearsonjCanadajInc.
, 4 C H A P T E jRj 1
A n s w e r s j to j the j S tudy j Plan j P r o b l e m s j and j Ap p l i c a t i o n s j
1. ApplejInc.jdecidesjtojmakejiTunesjfreelyjavailablejinjunlimitedjquantities.
a. DoesjApple’sjdecisionjchangejthejincentivesjthatjpeoplejface?
Apple’sjdecisionjchangesjpeople’sjincentives.jForjexample,jitjincreasesjthejincentivejtojbuyjanji
Podjtojtakejadvantagejofjthejnewlyj“free”jmusicjavailablejonjiTunes.
b. IsjApple’sjdecisionjanjexamplejofjajmicroeconomicjorjajmacroeconomicjissue?jApple’sjd
ecisionjisjajmicroeconomicjissuejbecausejitjaffectsjajsinglejcompanyjandjajsinglejmarket.
2. Whichjofjthejfollowingjpairsjdoesjnotjmatch?
a. Labourjandjwages
Labourjearnsjwages,jsojthisjpairjmatches.
b. Landjandjrent
Landjearnsjrent,jsojthisjpairjmatches.
c. Entrepreneurshipjandjprofit
Entrepreneurshipjearnsjprofit,jsojthisjpairjmatches.
d. Capitaljandjprofit
Capitaljearnsjinterest,jsojthisjpairjdoesjnotjmatch.
3. Explainjhowjthejfollowingjnewsjheadlinesjconcernjself-
interestjandjthejsocialjinterest.
a. StarbucksjExpandsjinjChina
Starbucks’jexpansionjisjajdecisionjmadejbyjStarbucksjtojfurtherjStarbucks’jinterest.jThejdecisio
njisjdirectlyjinjStarbucks’jself-
interest.jThejsocialjinterestjisjaffectedjbecausejStarbucks’jexpansionjwilljhavejanjeffectjinjChina
.jForjexample,jmorejChinesejmightjdrinkjcoffeejratherjthanjteajandjfewerjcoffeejshopsjrunjbyjChi
nesejfirmsjmightjopen.
b. McDonald’sjMovesjintojGourmetjCoffee
McDonald’sjdecisionjtojservejgourmetjcoffeejisjajdecisionjmadejbyjMcDonald’sjtojfurtherjMcDo
nald’sjinterest.jThejdecisionjisjdirectlyjinjMcDonald’sjself-
interest.jThejsocialjinterestjisjaffectedjbecausejmorejpeoplejwilljdrinkjcoffeejratherjthanjotherjdri
nksjsuchjasjtea.
c. FoodjMustjBejLabelledjwithjNutritionjData
Thejdecisionjtojrequirejthatjfoodjmustjbejlabelledjwithjnutritionjinformationjisjmadejinjthejsocialj
interest.jThisjdecisionjisjnotjmadejbyjanyjonejsinglejfirmjandjsojdoesjnotj(necessarily)jreflectja
nyone’sjself-interest.
4. Thejnightjbeforejanjeconomicsjtest,jyoujdecidejtojgojtojthejmoviesjinsteadjofjsta
yingjhomejandjworkingjyourjMyEconLabjStudyjPlan.jYoujgetj50jpercentjonjyourjt
estjcomparedjwithjthej70jpercentjthatjyoujnormallyjscore.
a. Didjyoujfacejajtradeoff?
Yes,jyoujfacedjajtradeoff.jThejtradeoffjwasjbetweenjajhigherjtestjscorejandjanjeveningjwithjyourj
friendsjatjthejmovies.
b. Whatjwasjthejopportunityjcostjofjyourjeveningjatjthejmovies?
Thejopportunityjcostjofjgoingjtojthejmoviesjisjthejfalljinjyourjgrade.jThatjisjthej20jpointsjforgonejfr
omjchoosingjtojseejthejmoviejratherjthanjstudy.
Copyrightj©j2016jPearsonjCanadajInc.
