Chapter 1

Question 1

Incentives

Answer 1

rewards or penalties for engaging in a particular activity

Question 2

Economics

Answer 2

the study of how people allocate their limited resources to satisfy their unlimited wants

in short, the study of how people make choices

Question 3

Resources

Answer 3

things used to produce goods and services to satisfy people’s wants

Question 4

Wants

Answer 4

what people would buy if their incomes were unlimited

Question 5

The purpose of economics is to…

Answer 5

…explain choices.

Question 6

Two types of analyses in economics:

Answer 6

Microeconomics & Macroeconomics

Question 7

Microeconomics

Answer 7

study of decision-making undertaken by individuals (or households) and firms

ex: change in price of gas, or effect of new taxes on a specific industry

Question 8

Macroeconomics

Answer 8

study of behavior of the economy as a whole

includes such economywide phenomena as changes in unemployment, general price level, and national income

Question 9

Aggregates

Answer 9

total amounts/quantites

Question 10

Aggregate Demand

Answer 10

total planned expenditures throughout a nation

Question 11

Connection between Micro and Macro:

Answer 11

Micro decisions result in aggregates, which is the focus of Macro

Question 12

Economic System

Answer 12

a society’s institutional mechanism for determining the way in which scarce resources are used to satisfy human desires

Question 13

Three questions that must be addressed by every nation:

Answer 13

1. What and how much will be produced?
2. How will items be produced?
3. For whom will the items be produced?

Question 14

Econ System:

Centralized Command and Control (Central Planning)

Answer 14

An entity (king, dictator, central govt, etc) decides answers to the three questions.

Ex: govt may decide that a certain type of car should be produced at a certain amount; they’d issue rules of the production; then they’d decide who is authorized to purchase the cars

Question 15

Econ System:

The Price System (Market System)

Answer 15

Decentralized decision-making; individuals and families own all of the scarce resources used in production. These private parties decide answers to the three questions.

Ex: individuals decide what cars to produce and how many; they decide how to produce these cars; other individuals decide how much of their earnings they wish to spend on these cars

Question 16

Mixed Economic Systems

Answer 16

most econ systems of the world’s nations are mixed - incorporates both Centralized Planning and Market System

always leans toward one side or the other, but incorporates elements of both

Question 17

Does self-interest just pertain to increasing one’s wealth?

Answer 17

No, it also includes goals relating to prestige, friendship, power, helping, art, and other matters.

Question 18

Models, or Theories

Answer 18

simplified representations of the real world, used as the basis for predictions or explanations

Question 19

Ideas of Models and Realism

Answer 19

• no model in any science captures every detail or relationship that exists
• models are abstractions from reality
• models should only capture the essential relationships sufficient to analyze our particular problem/question

Question 20

Ceteris Paribus Assumption

kay-ter-us pear-uh-bus

Answer 20

assumption that nothing changes, except for the factor(s) being studied

we know certain factors influence decisions about making purchases, however we hold them constant when looking at relationship between changes in price and how much of a product will be purchased

Question 21

Empirical

Answer 21

relying on real-world data in evaluating the usefulness of a model

Question 22

Economic models don’t relate to the way people…

They relate to the way people…

Answer 22

think; act

Question 23

Behavioral Economics

Answer 23

an approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision-making

Question 24

Proponents of behavioral econ. suggest that traditional econ. models assume people exhibit three “unrealistic” characteristics:

Answer 24

1. Unbounded selfishness (people are only interested in their own satisfaction)
2. Unbounded willpower (choices are always consistent with their long-term goals)
3. Unbounded rationality (they are able to consider every relevant choice)

Question 25

Bounded Reality

Answer 25

hypothesis that people are nearly, but not fully, rational.

because of this, they cannot examine every possible choice available to them, but instead use simple rules of thumb to sort among the alternatives that happen to occur to them

Question 26

Rules of Thumb

bounded reality

Answer 26

• because every possibility cannot be considered, an individual will tend to fall back on the simpler methods of decision-making, rather than trying to sort through all possibilities
• a person will continue to rely on rule of thumb, even if there is a major change in their environment; however, economists have found that people respond to altered circumstances by fundamentally changing behaviors
• people will generally make decisions consistent with their own self-interest and long-term objectives

Question 27

Positive Analysis

Answer 27

a “what is” statement

also - value-free approach to inquiry! no subjective or moral judgments enter into this analysis.

Question 28

Positive Economics

Answer 28

“WHAT IS”

analysis strictly limited to making either purely descriptive statements or scientific predictions

Question 29

Normative Economics

Answer 29

“WHAT OUGHT TO BE”

analysis involving value judgments about economic policies; related to whether outcomes are good or bad

• a result of interjecting our values into the anaylsis

Question 30

Relationship between positive and normative economics:

Answer 30

“If price of gas rises, people will buy less”
(positive)

Adding “…so we should not allow the price to go up”
(normative)

Reason: we’ve added a value judgement; anytime the word “should” is involved, it is NORMATIVE!

Question 31

Rationality Assumption

Answer 31

the assumption that people do not intentionally make decisions that would leave them worse off