1. Economics and the economy

Question 1

The key economic problem for a society is

Answer 1

How to reconcile the conflict between PEOPLE’S VIRTUALLY LIMITLESS DESIRES for goods and services, and THE SCRCITY RESOURCES (labor, machinery, raw materials, and so on) with which these goods and services can be produced.

Question 2

The three basic (1) that every society faces are: (2)

Answer 2

1. trade-offs

2. WHAT goods and services to produce, HOW to produce them and FOR WHOM to produce them.

Question 3

A (1) is (2) if the demand of that resource at a zero price would exceed the available supply.
Economics is the study of how society (3) under conditions of scarcity.

Answer 3

1. resource
2. scarce
3. makes choices

Question 4

What, how and for whom to produce?
The answer to those questions is the result of the independent decisions of many (1).
In (2) a government planning office decides what will be produced, how it will be produced and for whom it will be produced. Detailed instructions are then issued to (3).

Answer 4

1. individuals and firms
2. a command economy
3. households, firms and workers

Question 5

Individuals decide how much to (1), what to (2) and how much to (3) of various goods and services.

Answer 5

1. work
2. buy
3. buy

Question 6

Firms decide what to (1), (2) to produce of various goods and services and which (3) to use in production.

Answer 6

1. produce
2. how much
3. resources

Question 7

The cost of an activity normally includes:
the (1), which is the amount of money we need to pay for doing it, and the (2), which is the value of the best alternative we must sacrifice for doing that activity.

Answer 7

1. explicit cost

2. opportunity cost

Question 8

The (1) (in a country or in the world) tells us (2)

Answer 8

1. income distribution

2. how total income is divided between different groups or individuals

Question 9

The (1) applies when one input (such as labor) is varied but other inputs (such as equipment and land) remain fixed.
The (1) says that each extra worker adds (2) to output than the previous extra worker added.

Answer 9

1. law of diminishing marginal returns

2. less

Question 10

By moving workers from one industry to the other, the economy can make more of one good but only by making (1) of the other good. There is a (2) between food output and film output.
The (3) shows, for each output of one good, the
maximum amount of the other good that can be produced.
(3) tell (4)

Answer 10

1. less
2. trade-off
3. production possibility frontier (PPF)
4. the opportunity cost of a good

Question 11

Production efficiency means

Answer 11

more output of one good can be obtained only by sacrificing output of other goods.

Question 12

An individual has a (1) compared to another in the

production of a good if she has a (2) in producing it.

Answer 12

1. comparative advantage

2. lower opportunity cost

Question 13

An individual has an (1) in producing a good if he or she is more efficient at producing that good compared to someone else.

Answer 13

1. absolute advantage

Question 14

A market is

Answer 14

a process by which

1. households’ decisions about consumption of alternative goods,
2. firms’ decisions about what and how to produce,
3. and workers’ decisions about how much and for whom to work are all reconciled by adjustment of prices.

Question 15

Free markets

Answer 15

Markets in which governments do not intervene

Question 16

The invisible hand is

Answer 16

the assertion that the individual pursuit of SELF-INTEREST within free markets may allocate resources efficiently from society’s viewpoint.

Question 17

In (1) the government and private sector jointly solve economic problems.
The government influences decisions through (2) of free services such as (3). It also regulates the extent to which individuals may (4).

Answer 17

1. a mixed economy
2. taxation, subsidies and provision
3. defence and the police
4. pursue their own self-interest

Question 18

Positive economics

Answer 18

studies objective or scientific explanations of HOW THE ECONOMY WORKS.

Question 19

Normative economics

Answer 19

offers RECOMMENDATIONS based on PERSONAL VALUE JUDGEMENTS.

Question 20

Microeconomics

Answer 20

offers a detailed treatment of how individuals and firms make economic decisions.

Question 21

Macroeconomics emphasizes (1). It deliberately simplifies the individual building blocks of the analysis in order to retain (2) of the complete interaction of the economy.

Answer 21

1. interactions in the economy as a whole

2. a manageable analysis

Question 22

Gross domestic product (GDP) is

Answer 22

the value of TOTAL OUTPUT produced in an economy in a given period.

Question 23

The aggregate price level

Answer 23

measures the average price of goods and services.

Question 24

The unemployment rate is

Answer 24

the fraction of the labor force unemployed but ACTIVELY LOOKING FOR A JOB.

Question 25

Economics analyses (1). The key economic problem is to reconcile the conflict between (2) and (3) to fulfill these demands.

Answer 25

1. what, how and for whom society produces
2. people’s virtually limited demands
3. society’s limited ability to produce goods and services

Question 26

Rational individuals, in making choices, must compare (1) associated with those choices. A choice is made only if (2).

Answer 26

1. the benefits and the costs

2. the benefit of doing it is larger than its cost

Question 27

The (1) (PPF) shows (2) that can be produced given the output of another good. It depicts the tradeoff or menu of choices for society in deciding (3). Resources are (4) and points outside the frontier are (5). It is inefficient to produce within the frontier.

Answer 27

1. production possibility frontier
2. the maximum amount of one good
3. what to produce
4. scarce
5. unattainable

Question 28

The (1) is the value of the best alternative that we must sacrifice. It is (2).

Answer 28

1. opportunity cost of an activity

2. the slope of the PPF

Question 29

If individuals, firms or countries have different opportunity costs of producing a good compared to others, they have (1). The fact that individuals have (1) in producing different goods creates the possibility for gains from trading.

Answer 29

1. a comparative advantage/comparative advantages

Question 30

Industrial countries rely extensively on (1) to allocate resources. The market resolves (2) by (3).

Answer 30

1. markets
2. production and consumption decisions
3. adjustments in prices

Question 31

In (1), decisions on what, how and for whom are made in a central planning office. (2)

Answer 31

1. a command economy

2. No economy relies entirely on command.

Question 32

A free market economy has (1). Resources are allocated entirely through markets in which individuals (2). Adam Smith argued that (3) would nevertheless allocate resources efficiently.

Answer 32

1. no government intervention
2. pursue their own self-interest
3. an ‘invisible hand’

Question 33

Modern economies are (1), relying mainly on the market but with (2). The (3) is hotly debated.

Answer 33

1. mixed
2. a large dose of government intervention
3. optimal level of intervention

Question 34

Positive economics studies (1). Normative economics (2). The two should be kept separate.
Given sufficient research, economists could agree on issues in (3). (4) involves subjective value judgements. There is (5) why people should agree about normative statements.

Answer 34

1. how the economy actually behaves
2. recommends what should be done
3. positive economics
4. Normative economics
5. no reason

Question 35

Microeconomics offers a detailed analysis of (1). For simplicity, it may (2). Macroeconomics emphasizes (3) at the cost of simplifying the individual building blocks.

Answer 35

1. particular activities in the economy
2. neglect some interactions with the rest of the economy
3. these interactions