Chapters 1 and 2

Question 1

Economics

Answer 1

Choices people make and actions they take to make the best use of scarce resources for their wants and needs

Question 2

Economics choices rule

Answer 2

if benefit (x) > cost (x), do action x

Question 3

Thinking on the margin

Answer 3

We take marginal benefit if
marginal benefit (x) > marginal cost (x)

Question 4

Microeconomics

Answer 4

Study of choices of individual economics units like households, firms, and consumers

Question 5

Macroeconomics

Answer 5

Study of the behaviour of the entire economy including, unemployment, inflation, and GDP.

Question 6

Allocation of resources is judged on the basis of:

Answer 6

-Efficiency
-Equity
-Moral and Political Consequences

Question 7

Efficiency

Answer 7

Present value of net benefits are maximized (increases over time)

Question 8

Equity

Answer 8

the allocation of goods is considered fair

Question 9

Four categories of Scarce Resources:

Answer 9

land, labor, capital, entrepreneurship

Question 10

Positive Economics

Answer 10

Statements about what is and what can be tested by checking statements against observed facts ie: “if the price of coffee rises, people will buy less coffee”.

Question 11

Normative Economics

Answer 11

Involves statements about what ought to be. Depends on values and beliefs, and can not be tested. ie: “Taxes should be used to redistribute wealth”

Question 12

8 Points about Economics as a science

Answer 12

-Economics is a social science that seeks to explain how people act

-uses models/theories to see how people behave

-model = simplified version of how things work

-model is not complete description of every detail but a description of a wide range of possibilities

-models/theories are meant to provide an explanation

-should be useful in predicting behaviour

-empirical science

-theories and models are tested against observed information

Question 13

The Correlation Fallacy

Answer 13

Incorrect fallacy that correlation implies causation

Question 14

The Post Hoc Fallacy

Answer 14

A special case of the correlation fallacy (an error of reasoning that a first event causes a second event, because the first event occurred first)

Question 15

Fallacy of Composition

Answer 15

Incorrect belief that what is true for the individual is also true for the group.

Question 16

What does the Production Possibilities Frontier Curve show?

Answer 16

The combinations of goods and services that can be produced when the factors of production are utilized to their full potential.

Question 17

What is a PPF drawn for?

Answer 17

a given level of society inputs (labor, natural resources), and for a given state of society’s technology.

Question 18

If there is high unemployment will the PPF shift?

Answer 18

no, it will just be less efficient

Question 19

As you go right in the PPF, is the opportunity cost for the Y-axis getting bigger or smaller?

Answer 19

bigger

Question 20

Law of increasing costs

Answer 20

In order to produce an extra amount of one good, society must give up ever increasing amounts of the other good.

Question 21

What are the three groups that the players in the market belong to>

Answer 21

-households
-firms
-Government

Question 22

The Market Economy

Answer 22

a place where buyers and sellers interact. In economics we assume that individuals act as if motivated by self-interest and act in a rational way.

Question 23

Rationality Assumption

Answer 23

Individuals do not rationally make decisions that will leave them worse off

Question 24

Households

Answer 24

these are consumers of good and services and the sellers of factor of production. the objection of households is to maximize satisfaction.

Question 25

Firms

Answer 25

these are the producers of goods and services. These are also the demands of factors of production. Their objective is to maximize profits.

Question 26

Opportunity cost

Answer 26

benefit given up by not using the sources in a next best alternative way

Question 27

3 types of economies

Answer 27

-Government (Centrally Planned)
-Market Economy
-Mixed Economy