Chapter 1

Question 1

Scarcity

Answer 1

the limited nature of society’s resources

Question 2

economics

Answer 2

the study of how society manages its scarce resources

Question 3

ten principles of economics

Answer 3

Principles of how people make decisions
1. people face trade-offs
2. the cost of something is what you give up to get it
3. rational people think at the margin
4. people respond to incentatives
the principles of how people interact
5. trade can make everyone better off
6. markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
principles of how the economy as a whole works
8. a country’s standard of living depends on its ability to produce goods and services
9. prices rise when the government prints too much money
10. society faces a short-run trade-off between inflation and unemployment

Question 4

efficiency

Answer 4

when society gets the most from its scarce resources

Question 5

equality

Answer 5

when prosperity is distributed uniformly among society’s members

Question 6

tradeoff

Answer 6

to achieve greater equality, could redistribute income from wealthy to poor. but this reduces incentive to work and produce, shrinks the size of the economic “pie”

Question 7

making decisions

Answer 7

requires comparing the costs and benefits of alternative choices

Question 8

opportunity cost

Answer 8

any item is whatever must be given up to obtain it

Question 9

rational people

Answer 9

systematically and purposefully do the best they can to achieve their objectives. make decisions by evaluating costs and benefits or marginal changes

Question 10

incentive

Answer 10

something that induces a person to act, i.e. the prospect of a reward or punishment

Question 11

market

Answer 11

a group of buyers and sellers, organize economic activity means determining what goods to produce, how to produce them, how much of each to produce, who gets them

Question 12

a market economy

Answer 12

allocates resources through the decentralized decisions of many households and firms as they interact in markets

Question 13

invisible hand

Answer 13

works through the price system, the interaction of buyers and sellers determines prices, each price reflects the good’s value to buyers and the cost of producing the good

Question 14

corollary

Answer 14

government intervention

Question 15

market failure

Answer 15

when the market fails to allocate society’s resources efficiently

Question 16

externalities

Answer 16

when the production or consumption of a good affects bystanders eg pollution

Question 17

market power

Answer 17

a single buyer or seller has substantial influence on market price eg monopoly

Question 18

promoting equity

Answer 18

government may alter market outcome

Question 19

productivity

Answer 19

the amount of goods and services produced per unit of labor

Question 20

inflation

Answer 20

increases in the general level of prices

Question 21

short-run

Answer 21

stimulates the overall level of spending and the demand for goods and services