Chapter 1

Question 1

Economics

Answer 1

the study of how people, individually and collectively, manage resources

Question 2

Microeconomics

Answer 2

the study of how individuals and firms handle resources

Question 3

Macroeconomics

Answer 3

the study of the economy on a regional, national, or international scale

Question 4

Rational Behavior

Answer 4

making choices to achieve goals in the most effective way possible

Question 5

How Economists Break Down Problems (4 Questions)

Answer 5

1. What are the wants and constraints of those involved?
2. What are the trad-offs
3. How will others respond?
4. Why isn’t everyone doing it already?

Question 6

Scarcity

Answer 6

the condition of wanting more than we can get with available resources

Question 7

Opportunity Cost

Answer 7

the value of what you had to give up in order to get something; the value of your next-best alternative - the “opportunity” you have to pass up in order to take your first choice.

Question 8

Marginal decision making

Answer 8

comparison of additional benefits of a choice against the additional costs, without considering related benefits and costs of past choices

Question 9

Sunk Costs

Answer 9

costs that have already been incurred and cannot be recovered or refunded; (should not have bearing on marginal decision, but usually do psychologically)

Question 10

Incentive

Answer 10

something that causes people to behave in a certain way by changing the trade-offs they face;
“Positive Incentive” (Incentive) - makes people more likely to do something
“Negative Incentive” (Disincentive) - makes people less likely to do something

Question 11

Trade-offs: Two Assumptions Economists Make

Answer 11

1. People respond to incentives

2. Nothing occurs in a vacuum - there will always be a reaction to every action

Question 12

Collateral

Answer 12

a possession pledged by a borrower to a lender; ex: a house, a car, etc.

Question 13

Efficiency

Answer 13

use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society

Question 14

Abnormal Economic Circumstances (Causing Inefficiency)

Answer 14

1. Innovation - “too new”; did not exist to take advantage of
2. Market Failure - no market for product or service due to a variety of circumstances, e.g., lack of collateral
3. Intervention - intentional or unintentional via gov’t or powerful source
4. Goals other than profit - social justice, art, etc.

Question 15

Normative Analysis

Answer 15

how one wants the world to look, or should work

Question 16

Positive Analysis

Answer 16

how the world actually works

Question 17

Correlation

Answer 17

a consistently observed relationship between two events or variables
“Positively Correlated” (Directly) - occur at the same time or move in the same direction
“Negatively Correlated” (Inversely) - one event or variable increases, while a related event or variable decreases; move in opposite directions
“Uncorrelated” - NO relationship

Question 18

Causation

Answer 18

a relationship between two events in which one brings about the other

Question 19

Three Ways Correlation and Causation Can Be Confused

Answer 19

1. Correlation without causation
2. Omitted variables
3. Reverse causation

Question 20

Reverse Causation

Answer 20

did A cause B, or did B cause A?
Ex: Rain (A) causes raincoats (B); OR
Raincoats (B) cause rain (A)

Question 21

Model

Answer 21

simplified representation of a complicated situation; (economics) show how people, firms, and governments make decisions about managing resources, and how their decisions interact

Question 22

Circular Flow Model

Answer 22

an economic model; simplified representations of how the economy’s transactions work together
Actors:
1. Households - supply land and labor to firms (land, labor, capital = factors of production); buy goods and services produced by firms
2. Firms - buy or rent land, labor, capital; produce and sell goods and services

Question 23

Factors of Production

Answer 23

land, labor, and capital (found in households)

Question 24

Market for Goods and Services

Answer 24

all activity involved in the buying and selling of goods and services; households spend wages from labor and income from land and capital, and firms earn revenue from selling their goods and services

Question 25

Market for Factors of Production

Answer 25

households supply land, labor, and capital, and firms hire and purchase or rent these inputs

Question 26

Three Things A Model Should Do

Answer 26

1. Predict cause and effect
2. Make clear assumptions
3. Describe the real world accurately

Question 27

Positive Statement

Answer 27

a statement that makes a claim about how the world actually works

Question 28

Normative Statement

Answer 28

a statement that makes a claim about how the world should be