Ch. 1: Economics and Economic Reasoning

Question 1

Economics

Answer 1

The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.

Question 2

Scarcity

Answer 2

The goods available are too few to satisfy individuals’ desires.

Question 3

Microeconomics

Answer 3

The study of individual choice, and how that choice is influenced by economic forces. (It studies such things as the pricing policies of firms, households’ decisions on what to buy, and how markets allocate resources among alternative ends.)

Question 4

Macroeconomics

Answer 4

The study of the economy as a whole. (Focuses on aggregate relationships such as how household consumption is related to income and how government policies can affect growth.

Question 5

Marginal cost

Answer 5

The additional cost to you over and above the costs you have already incurred.

Question 6

Sunk costs

Answer 6

Costs that have already been incurred and cannot be recovered

Question 7

Marginal benefit

Answer 7

The additional benefit above what you’ve already derived.

Question 8

Economic decision rule

Answer 8

If the marginal benefits of doing something exceed the marginal costs, do it.

If the marginal costs of doing something exceed the marginal benefits, don’t do it.

Question 9

Opportunity cost

Answer 9

The benefit that you might have gained from choosing the next-best alternative.

Question 10

Economic forces

Answer 10

The necessary reactions to scarcity.

Question 11

Market force

Answer 11

An economic force that is given relatively free to rein by society to work through the market.

Question 12

Invisible hand

Answer 12

The price mechanism, the rise and fall of prices that guides our actions in a market.

Question 13

Economic model

Answer 13

A framework that places the generalized insights of the theory in a more specific contextual setting.

Question 14

Economic principle

Answer 14

A commonly held economic insight stated as a law or principle.

Question 15

Experimental economics

Answer 15

A branch of economics that studies the economy through controlled laboratory experiments.

Question 16

Natural experiments

Answer 16

Naturally occurring events that approximate a controlled experiment where something has changed in one place but has not changed somewhere else.

Question 17

Theorems

Answer 17

Propositions that are logically true based on the assumptions in a model.

Question 18

Precepts

Answer 18

Policy rules that conclude that a particular course of action is preferable.

Question 19

Efficiency

Answer 19

Achieving a goal as cheaply as possible.

Question 20

Invisible hand theorem

Answer 20

A market economy, through the price mechanism, will tend to allocate resources efficiently. (Theories rely on simplifying assumptions, and if you don’t know the assumptions, you don’t know the theory.)

Question 21

Economic policies

Answer 21

Actions (or inaction) taken by government to influence economic actions.

Question 22

Positive economics

Answer 22

The study of what is, and how the economy works.

Question 23

Normative economics

Answer 23

The study of what the goals of the economy should be.

Question 24

The art of economics

Answer 24

The application of the knowledge learned in a positive economics to achieve the goals one has determined in normative economics.