Chapter 1

Question 1

What is a market?

Answer 1

Group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Question 2

What are the 3 important ideas in markets?

Answer 2

1. People are rational
2. People respond to economic incentives
3. Optimal decisions are made at the margin

Question 3

What does it mean by “people are rational?”

Answer 3

Producers and firms use all available information as they act to achieve their goals

Question 4

True or False: People respond only to economic incentives

Answer 4

False

Question 5

What does marginal mean?

Answer 5

“extra” or “additional”

Question 6

What does it mean by optimal decisions are made at the margin?

Answer 6

To continue any activity up to the point where the marginal benefit equals the marginal cost

Question 7

What does marginal analysis mean?

Answer 7

Analysis that involves comparing marginal benefits and marginal costs

Question 8

What are trade-offs?

Answer 8

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service

Question 9

What are opportunity costs?

Answer 9

The highest-valued alternative that must be given up to engage in an activity

Question 10

What are the 3 fundamental questions faced when dealing with trade-offs?

Answer 10

1. What goods or services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services?

Question 11

What 3 groups determine what goods or services will be produced and how do they determine?

Answer 11

1. Consumers - Help decide which goods or services firms will produce
2. Firms - In response to consumers preferences, they must decide what to devote their resources into selling
3. Government - Choose where to allocate their budget to

Question 12

What is a centrally planned economy?

Answer 12

An economy in which the government decides how economic resources will be allocated

Question 13

What is a market economy?

Answer 13

An economy in which the decisions of the households and firms as they interact in markets determine the allocation. Have to meet needs of consumers or they will go out of business

Question 14

True or false (explain why?): Standard of living is low in centrally planned economies

Answer 14

True; the government can fail to meet the needs of the people because they don’t know the needs of every individual.

Question 15

What is a mixed economy?

Answer 15

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which a government plays a significant role in the allocation of resources

Question 16

What is productive efficiency?

Answer 16

When a good or service is produced at the lowest possible cost

Question 17

What is allocative efficiency?

Answer 17

Production is in accordance with consumer preferences

Question 18

What is voluntary exchange?

Answer 18

A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction

Question 19

How can inefficiency rise?

Answer 19

• Firms take time to learn how to efficiently produce good or service
• Government interfere with voluntary exchange in markets

Question 20

What is equity in economics?

Answer 20

Fair distribution of economic benefits

Question 21

Explain the trade-off between efficiency and equity?

Answer 21

Governments could increase equity by reducing incomes of high-income people and increase for low-income people, but this would reduce efficiency because people will have less incentive to work

Question 22

What are economic models?

Answer 22

A simplified version of reality used to analyze real world economic situations

Question 23

What are the steps economists take to develop a model?

Answer 23

1. Decide on the assumptions to use
2. Formulate a testable hypothesis
3. Use economic data to test hypothesis
4. Revise the model if it fails to explain the economic data well
5. Retain the model to help answer similar economic questions in the future

Question 24

What are the role of assumptions?

Answer 24

Assume consumers will buy the goods and services that will maximize their well-being (consumers) and profits (firms)

Question 25

What is an economic variable?

Answer 25

Something measurable that can have different values, such as the number of people employed in manufacturing

Question 26

What is positive analysis?

Answer 26

Concerned with what is

Question 27

What is normative analysis?

Answer 27

Concerned with what ought to be

Question 28

What is microeconomics?

Answer 28

Study of how households and firms make choices, interact in markets, and how the government attempts to influence their choices

Question 29

What is macroeconomics?

Answer 29

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

Question 30

True or False: Many economic situations have a micro and a macro aspect

Answer 30

True

Question 31

What is innovation?

Answer 31

The practical application of an invention

Question 32

What is technology?

Answer 32

Process used to produce goods and services

Question 33

What is monetary policy?

Answer 33

Interest rate and money supply policies implemented by a nation’s central bank to keep its economy bon track