Name:________________________ AP Economics

Period:__________ Date:______________
Reading Questions for Mankiw, Chapter one
Directions: Read Chapter one of Mankiw. Add the vocabulary definitions and answer the questions below as you read.
Scarcity:
Economics:

Principle One – People Face Tradeoffs

Why is there truly no such thing as a free lunch? –

What is an example of a tradeoff a government (society) will most likely have to make? –

Efficiency –

Equality –

Which one measures the size of the economic pie? –

What measures the size of the individual slices? –

Why do these two goals often conflict? –

Principle 2: The Cost of Something is What you Give up to Get it!

Opportunity Cost:

Describe a monetary opportunity cost:

Describe a nonmonetary opportunity cost:

Principle 3: Rational People think at the Margin

Rational people:

Marginal Change:

In plain English, what is a marginal change (think edge)?

Describe the airline thinking at the margin:

What is a marginal benefit?

Principle 4: People respond to Incentives

Incentive:

Why should public policy makers keep incentives in mind? –

Why do people in Europe drive smaller cars? -

What is an unintended consequence?

Principle 5: Trade can make everyone better off.

Why does trade generally make both countries better off?

Why is specialization important?

Principle 6: Markets are Usually a Good Way to Organize Economic Activity

How did communist countries approach their economy?

Market Economy:

What replaces central planners in a market economy?

In his book Wealth of Nations, Adam Smith states markets act as it they are guided by an “invisible hand.” What is the
instrument by which the invisible hand directs economic activity?

What do market prices affect?

What happens when the government manipulates prices?

Principle 7: Governments Can Sometimes Improve Market outcomes

Property rights:
Why do governments need to enforce property rights?

Market failure:

Externality:

Market Power:

Principle 8: A Country’s Standard of Living Depends on its Ability to Produce Goods and Services.
Productivity:

What explains the large differences in standard of living among countries?

How can a country raise productivity?

Principle 9: Prices Rise When the Government Prints too Much Money!
Inflation:
What causes inflation?

Principle 10: Society Faces a Short-run Tradeoff between Inflation and Unemployment.
What does it mean that there is a tradeoff between Inflation and Unemployment?
Business cycle:
Name:________________________ AP Economics
Period:__________ Date:______________

Reading Questions for Mankiw, Chapter one

Directions: Read Chapter one of Mankiw. Add the vocabulary definitions and answer the questions below as you read.
Scarcity: the limited nature society’s resources

Economics: the study of how society manages its scarce resources

Principle One – People Face Tradeoffs

Why is there truly no such thing as a free lunch? – Making a decision requires trading one goal against another

What is an example of a tradeoff a government (society) will most likely have to make? – Guns – national defense vs.
Butter – raising standard of living in a country

Efficiency – the property of society getting the most it can from its scarce resources

Equality – the property of distributing economic prosperity uniformly among members of society

Which one measures the size of the economic pie? – efficiency

What measures the size of the individual slices? – equality

Why do these two goals often conflict? –when the govt tries to cut the pie into more equal slices, the pie gets smaller

Principle 2: The Cost of Something is What you Give up to Get it!

Opportunity Cost: whatever must be given up to obtain some item

Describe a monetary opportunity cost: Choosing to go out with your friends instead of working

Describe a nonmonetary opportunity cost: Choosing to stay home and study to get a better grade and not going out
with friends.

Principle 3: Rational People think at the Margin

Rational people: People who systematically and purposefully do the best they can to achieve their objectives

Marginal Change: a small incremental adjustment to a plan of action

In plain English, what is a marginal change (think edge)? Adjustments around the edges of what you are doing – often
made by balancing marginal costs and marginal benefits

Describe the airline thinking at the margin: It may cost an airline $500 to fly a passenger but if the plane has 10 empty
seats and someone will pay 300 at the gate, the cost of adding one more passenger is tiny – bag of peanuts and a can
of soda. The average cost is $500 and the marginal cost is the cost of the bag of peanuts and a can of soda
What is a marginal benefit? The extra unit of a good – people are willing to pay for a good based on its marginal
benefit that the extra unit of that good would yield.

Principle 4: People respond to Incentives

Incentive: something that induces a person to act, such as the prospect of a punishment or reward

Why should public policy makers keep incentives in mind? – most policies change the costs and benefits people face,
thus changing their behavior

Why do people in Europe drive smaller cars? - Gasoline taxes are so high it encourages people to drive small fuel
efficient cars.

What is an unintended consequence? All policies passed by the government end up having unintended consequences
– things happen that you did not predict or expect. When the government fails to consider how their policies affect
incentives tends to create the most unintended consequences.

Principle 5: Trade can make everyone better off.

Why does trade generally make both countries better off? Trade allows each country to specialize in the activities that
country does best; people can buy a greater variety of goods and services at a lower cost.

Why is specialization important? It allows a person or country to make what they are best at making

Principle 6: Markets are Usually a Good Way to Organize Economic Activity

How did communist countries approach their economy? Government officials (central planners) were the best ones to
make decisions allocating the country’s scarce resources.

Market Economy: an economy that allocates resources through decentralized decisions of many firms and households
as they interact in markets for good and services.

What replaces central planners in a market economy? The decisions of the firms and households; firms decide what
whom to hire and what to make and households decide who to work for and what to buy

In his book Wealth of Nations, Adam Smith states markets act as it they are guided by an “invisible hand.” What is the
instrument by which the invisible hand directs economic activity? Prices. Market prices reflect the value of the good to
society and cost of society of making the good.

What do market prices affect? How much people are willing to buy and how much people are willing to sell

What happens when the government manipulates prices? It distorts the market; impedes the invisible hand’s ability to
coordinate buyers and sellers

Principle 7: Governments Can Sometimes Improve Market outcomes

Property rights: the ability of an individual to won and exercise control over scarce resources

Why do governments need to enforce property rights? The invisible hand can only work if government enforces the
rules, especially institutions that enforce property rights. A farmer will not crow crops if his crop will get stolen.
Market failure: a situation in which the market left on its own fails to allocate resources efficiently.

Externality: the impact of one person’s actions on the well-being of a bystander

Market Power: the ability of a single economic actor (or small group of actors) to have a substantial influence on
market prices

Principle 8: A Country’s Standard of Living Depends on its Ability to Produce Goods and Services.
Productivity: the quantity of goods and services produced from each unit of labor input

What explains the large differences in standard of living among countries? Differences in productivity. In nations that
can produce large quantities of good and services per unit of labor input have a higher standard of living.

How can a country raise productivity? Make sure workers are well-educated; have the tools needed to produce goods
and services and have access to the best available technology

Principle 9: Prices Rise When the Government Prints too Much Money!
Inflation: an increase in the overall level of prices in the economy

What causes inflation? A growth in the quantity of money printed by a country

Principle 10: Society Faces a Short-run Tradeoff between Inflation and Unemployment.
What does it mean that there is a tradeoff between Inflation and Unemployment? It means if inflation is falling,
generally unemployment is rising and if inflation is rising, unemployment is falling.

Business cycle: fluctuations in economic activity, such as employment and production