Chapter 1

Question 1

economics

Answer 1

the social science that studies how people make decisions in the face of scarcity and the resulting impact of such decisions on both society as a whole and the individual members therein

Question 2

scarcity

Answer 2

a universal phenomenon that arises because resources are limited

Question 3

tradeoffs

Answer 3

the recognition that in many situations acquiring more of one thing can often only be done at the expense of getting by with less of something else

Question 4

microeconomics

Answer 4

the study of how individual decision makers behave and interact with each other, often with a focus on how households and firms behave and interact with each other in markets

Question 5

macroeconomics

Answer 5

the study of the functioning and performance of a society’s economy as a whole, often with a focus on levels of and changes in aggregate measures such as the inflation rate, unemployment rate, and gross domestic product growth rate

Question 6

positive statement

Answer 6

a statement that aims to describe how the world actually is or actually functions

Question 7

normative statement

Answer 7

a statement that aims to assess the desirability of how the world is or functions, perhaps with suggestions of things that could be done to improve matters

Question 8

rational decision maker

Answer 8

someone with a well-defined goal, who takes action to achieve the goal as best as possible

Question 9

total benefits

Answer 9

the gains that a person realizes from taking an action

Question 10

total costs

Answer 10

the burdens that a person incurs from taking an action

Question 11

total economic surplus

Answer 11

the difference between total benefits and total costs

Question 12

Cost-Benefit Principle

Answer 12

a guide to decision-making which states that an individual should undertake an activity if and only if the additional benefit of doing so is greater than or equal to the additional cost of doing so

Question 13

marginal benefit

Answer 13

the change in the value of total benefits as more of an activity is undertaken

Question 14

Incentive Principle

Answer 14

a summary of how behavior of a rational decision maker will change as costs or benefits change: (1) if the marginal benefit of an activity increases, then a rational person will engage in more of the activity, whereas (2) if the marginal cost of an activity increases, then a rational person will engage in less of the activity

Question 15

self-interested individual

Answer 15

someone who makes their own personal assessment of the benefits and costs associated with different outcomes, and who subsequently uses these measures as the basis for decision making