Chapter 1: The Art and Science of Economic Analysis

Question 1

Economics

Answer 1

the study of how people use their scarce resources to satisfy their unlimited wants

Question 2

Resources

Answer 2

the inputs, or factors of production, used to produce the goods and services that people want; consists of labor, capital, natural resources, and entrepreneurial ability

Question 3

Labor

Answer 3

the physical and mental effort used to produce goods and services

Question 4

capital

Answer 4

the buildings, equipment, and human skills used to produce goods and services

Question 5

Physical capital

Answer 5

factories, tools, machines, computers, buildings, airports, highways, and other human creations used to produce goods and services

Question 6

Human capital

Answer 6

consists on knowledge and skill people acquire to increase their productivity

Question 7

Natural resources

Answer 7

all gifts of nature used to produce goods and services; includes renewable and exhaustible resources

Question 8

Renewable resource

Answer 8

draw on indefinitely if used conservatively

Question 9

Exhaustible resource

Answer 9

does not renew itself and so available in limited amounts

Question 10

Entrepreneurial ability

Answer 10

the imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss

Question 11

Entrepreneur

Answer 11

a profit seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation

Question 12

Wages

Answer 12

payment to resource owners for their labor

Question 13

Interest

Answer 13

pavement to the resources owner for the use of their capital

Question 14

Rent

Answer 14

Payment to resources owners for the use of their natural resources

Question 15

Profit

Answer 15

reward for entrepreneurial ability; sales revenue minus resource cost

Question 16

Good

Answer 16

a tangible product used to satisfy human wants

Question 17

Service

Answer 17

an activity, or intangible product, used to satisfy human wants

Question 18

desire exceeds the amount available at a zero price

Answer 18

A good or service is scarce if the amount people _______

Question 19

Bads

Answer 19

Things we want none of even at zero price

Question 20

Scarcity

Answer 20

Occurs when the amount people desire exceeds the amount available at a zero price

Question 21

Air and sea water

Answer 21

A few goods seem free because the amount available at a zero price exceed the amount people want, for example:

Question 22

Without scarcity, there would be no economic problem and no need for prices

Answer 22

Goods and services that are truly free are not the subject economics.

Question 23

Consumer

Answer 23

Demand the goods and services produces

Question 24

Resources owners

Answer 24

Supply resources to firms, government, and the rest of the world

Question 25

Markets

Answer 25

a set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms

Question 26

Product market

Answer 26

a market in which a good or service is bought and sold

Question 27

Resource market

Answer 27

a market in which a resources are bought and sold

Question 28

circular-flow model

Answer 28

a diagram that traces the flow of resources, products, income, and revenue among economic decision makers

Question 29

Rational self-interest

Answer 29

each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit

Question 30

Self-interest

Answer 30

does not rule out concern for others, but it means that concern is influenced by the same economic forces that affect other economic choices

Question 31

Marginal

Answer 31

incremental, additional, or extra; used to describe a change in an economic variable

Question 32

exceeds the expected marginal cost

Answer 32

A rational decision maker changes the status quo if the expected marginal benefit from the change

Question 33

Microeconomics

Answer 33

the study of the economic behavior in particular markets, such as that for computers or unskilled labor - Individual economic choices - Markets coordinate the choices of economic decision makers - Individual pieces of the puzzle

Question 34

Macroeconomics

Answer 34

the study of the economic behavior of entire economies, as measured, for example, by total production and employment -Performance of the economy as a whole

Question 35

Recession

Answer 35

decline in economic activity as reflected by a decline in production, employment, or other aggregate measures

Question 36

Economic fluctuations

Answer 36

the rise and fall of economic activity relative to the lantern growth trend of the economy, also called business cycles

Question 37

Economic theory/economic model

Answer 37

a simplification of reality used to make predictions about cause and effect in the real world

Question 38

The Scientific Method

Answer 38

Identify the question and define relevant variables Specify assumptions Formulate a hypothesis Test the hypothesis

Question 39

Variable

Answer 39

a measure, such as price or quantity that can take on different value is at different times

Question 40

Other-things-constant assumption

Answer 40

the assumption, when focusing on thee relation among key economic variables, that other variables remain unchanged, ceteris paribus

Question 41

Behavioral assumptions

Answer 41

an assumption that describes the expected behavior of economic decision makers-what motivates them

Question 42

Positive economic statement

Answer 42

a statement that can be proved or disproved by reference to facts

Question 43

Normative economic statement

Answer 43

a statement that reflects an opinion which cannot be proved or disproved by reference to the facts

Question 44

offset one another so the average behavior of a large group can be predicted more accurately than the behavior of a particular individual

Answer 44

The random actions of individuals tend to

Question 45

Association-is-causation fallacy

Answer 45

the incorrect idea that if two variables are associated in time, one must necessarily cause the other

Question 46

Fallacy of composition

Answer 46

the incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole

Question 47

Secondary effects

Answer 47

unintended consequences of economic actions that may develop slowly over time as people react to events