Chapter 2

Question 1

Economics

Answer 1

The study of how individuals, firms, and society make decisions to allocate limited resources to many competing wants.

Question 2

Scarcity

Answer 2

Too many wants, too little resources for these wants
- people must make choices given the resource limitations they face

Question 3

Incentives

Answer 3

The factors that motivate individuals and firms to make decisions in their best interest
- economists begin most questions by considering how rational people would respond to the incentives that specific situation provide

Question 4

Microeconomics

Answer 4

The study of the decision making by individuals, businesses, and industries.
-mIcroeconomics- “i” for individual (person/firm)

Question 5

Macroeconomics

Answer 5

This study of the broader issues in the economy such as inflation, unemployment, and national output of goods and services.
-mAcroeconomics- “a” stands for aggregate (cities/nations)

Question 6

Ceteris paribus

Answer 6

Assumption used in economics that other relevant factors/variables are held constant.
- “All other things equal”

Question 7

Model Building

Answer 7

Models are created and then tested

Question 8

Efficiency

Answer 8

Deals with how well resources are used and allocated

Question 9

Production efficiency

Answer 9

When goods are produced at the lowest cost

Question 10

Allocative Efficiency

Answer 10

When individuals who desire a product the most obtain those goods and services

Question 11

Pareto efficiency

Answer 11

Occurs when society improves the well-being of as many individuals as possible without making anyone worse off

Question 12

Equity

Answer 12

The fairness of various issues and policies

Question 13

Positive qustions

Answer 13

A question that can be answered using available information or facts

Question 14

Normative Questions

Answer 14

A question whose answer is based on societal beliefs on what should or shouldn’t take place
- difficult to resolve this a differing opinions

Question 15

Key Principles of Economics

Answer 15

8 principles

Question 16

Principle of Economics 1

Answer 16

Economics is concerned with making choices with limited resources
-making decisions on allocating limited resources to maximize an individual or society’s well-being

Question 17

Principle of Economics 2

Answer 17

When making decisions one must take into account trade-offs and opportunity costs

Question 18

Trade-off

Answer 18

Have to decide between alternatives, which always exists whenever we make a decision

Question 19

Opportunity cost

Answer 19

The value of the next best alternative
- when you give up something for something else

Question 20

Principle of Economics 3

Answer 20

Specialization lead to gains for all involved
- as long as exchange is possible and those involved, trade in manually beneficial manner

Question 21

Specialization

Answer 21

Specialization in task in which one is more proficient
- can lead to gains for all parties as long as exchange is possible and those involved, trade in manually beneficial manner 

Question 22

Principle of Economics 4

Answer 22

People respond to incentives, both good and bad
- but, not everyone follow each incentive every time

Question 23

Incentive

Answer 23

Stimulation

Question 24

Principle of Economics 5

Answer 24

Rational behavior requires thinking on the margin

Question 25

Marginal benefit

Answer 25

What benefit you get, after paying the extra cost for something
Ex. The enjoyment you receive from the dessert

Question 26

Marginal Cost

Answer 26

Cost that you pay fro something
- ex. Extra cost of buying desert

Question 27

Thinking on the Margin

Answer 27

Considering whether marginal benefit worth the marginal cost
- wether benefits worth the extra costs

Question 28

Principle of Economics 6

Answer 28

Markets are generally efficient, when they aren’t, government can sometimes correct the failure

Question 29

Competition

Answer 29

Forces firms to provide products at the lowest possible price, or some other firm will undercut their high price

Question 30

Market is

Answer 30

Dynamic

Question 31

Prices and Profits

Answer 31

Drives and disciplines markets

Question 32

Invisible hand

Answer 32

Phenomenon that markets promote efficiency through the incentives faced by individuals and firms

Question 33

Principle of Economics 7

Answer 33

Economic growth, low unemployment, and low inflation — are economic goals that do not always coincide.

Question 34

Principle of Economics 8

Answer 34

Institutions and human creativity help explain the wealth of nations