Chapter 1: What is Economics?

Question 1

“oikonomos” (Greek)
* “One who manages a
household”

Answer 1

economy

Question 2

many decisions
* Allocate scarce resources
* Ability, effort, and desire
* Wants and need

Answer 2

household

Question 3

many decisions
* Allocate resources
* Allocate output

Answer 3

society

Question 4

Resources are _____

Answer 4

scarce

Question 5

the limited nature of society’s resources

Answer 5

scarcity

Question 6

he study of how society manages its scarce resources

Answer 6

economics

Question 7

economists study (3)

Answer 7

• How people make decisions
• How people interact with one another
• Analyze forces and trends that affect the economy as a whole

Question 7

how people make decisions
principle 1:

Answer 7

People face trade-offs

Question 8

the property of society getting the most it can from its scarce resources

Answer 8

efficiency

Question 8

the property of distributing economic prosperity uniformly among the members of society

Answer 8

equality

Question 9

how people make decisions
principle 2

Answer 9

The cost of something is what you give up to get it

Question 10

Compare cost with benefits of alternatives

Answer 10

make decisions

Question 10

whatever must be given up to obtain some item

Answer 10

opportunity cost

Question 11

how people make decisions
principle 3

Answer 11

Rational people think at the margin

Question 12

Systematically & purposefully do the best they can to achieve their objectives

Answer 12

rational people

Question 13

Small incremental adjustments to a plan of action

Answer 13

marginal changes

Question 14

Rational decision maker – take action only if

Answer 14

Marginal benefits > Marginal costs

Question 15

Something that induces a person to act

Answer 15

incentive

Question 16

Buyers - consume less

Sellers - produce more

Answer 16

higher price

Question 17

Change costs or benefits

Change people’s behavior

Answer 17

public policy

Question 18

how people make decisions
principle 4

Answer 18

People respond to incentives

Question 19

Car size & fuel efficiency; carpool; public transportation

Answer 19

gasoline tax

Question 20

Policymakers fail to consider how their policies affect incentives

Answer 20

unintended consequences

Question 21

how people interact
principle 5

Answer 21

trade can make everyone better off

Question 22

Specialization * Allows each person/country to specialize in the activities he/she does best * People/countries can buy a greater variety of goods and services at lower cost

Answer 22

trade

Question 23

how people interact principle 6

Answer 23

Markets are usually a good way to organize economic activity

Question 24

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services guided by prices and self interest adam smith's "invisible hand"

Answer 24

market economy

Question 25

communist countries

Answer 25

central planning

Question 26

Allocate economy’s scarce resources * Decided * What goods & services were produced * How much was produced * Who produced & consumed these goods & services

Answer 26

government officials (central planners)

Question 27

how people interact principle 7

Answer 27

Governments can sometimes improve market outcomes

Question 28

the ability of an individual to own and exercise control over scarce resources

Answer 28

property rights

Question 29

a situation in which a market left on its own fails to allocate resources efficiently

Answer 29

market failure

Question 30

causes for market failure the impact of one person’s actions on the well-being of a bystander

Answer 30

externality

Question 31

causes for market failure the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Answer 31

market power

Question 32

disparities in economic wellbeing

Answer 32

- market economy - government intervention

Question 33

ability to produce things that other people are willing to pay for

Answer 33

reward people

Question 34

* May diminish inequality * Process far from perfect

Answer 34

public policies

Question 35

how the economy as a whole works principle 8

Answer 35

A country’s standard of living depends on its ability to produce goods and services

Question 36

A country’s standard of living depends on its ability to produce goods and services

Answer 36

principle 8

Question 37

Quantity of goods & services produced from each unit of labor input

Answer 37

productivity

Question 37

Large differences in living standards

Answer 37

- among countries - over time explanation: differences in productivity

Question 38

Higher standard of living

Answer 38

higher productivity

Question 39

Determines growth rate of its average income

Answer 39

growth rate of nation's productivity

Question 40

Causes for large / persistent inflation

Answer 40

* Growth in quantity of money * Value of money falls

Question 40

How the Economy as a Whole Works - Prices rise when the government prints too much money

Answer 40

principle 9

Question 41

An increase in the overall level of prices in the economy

Answer 41

inflation

Question 42

How the Economy as a Whole Works - Society faces a short-run trade-off between inflation and unemployment

Answer 42

principle 10

Question 43

Short-run effects of monetary injections:

Answer 43

- stimulates - firms

Question 44

- overall level of spending * Higher demand for goods and services

Answer 44

stimulates

Question 45

– raise prices; hire more workers; produce more goods and services * Lower unemployment

Answer 45

firms

Question 46

fluctuations in economic activity, such as employment and production

Answer 46

business cycle

Question 47

More hiring means

Answer 47

lower unemployment

Question 48

Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of _____ and ____

Answer 48

good and services

Question 49

(4) How People Make Decisions

Answer 49

* 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 Incentives

Question 50

(3) How People Interact

Answer 50

* 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

Question 51

(3) How the Economy as a Whole Works

Answer 51

* 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