chap 1

Question 1

scarcity

Answer 1

Our inability to satisfy all our wants

Question 2

choices

Answer 2

Because we face scarcity, we must make

Question 3

incentive

Answer 3

An incentive is a reward that encourages an action or a penalty that discourages an action.

Question 4

Economics

Answer 4

is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

Question 5

Economics divides in two main parts:

Answer 5

Microeconomics
Macroeconomics

Question 6

Microeconomics

Answer 6

is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.

Question 7

Macroeconomics

Answer 7

the study of the performance of the national and global economies.

Question 8

Two big questions summarize the scope of economics:

Answer 8

How do choices end up determining what, how, and for whom goods and services get produced?
When do choices made in the pursuit of self-interest also promote the social interest?

Question 9

What, How, and For Whom? what

Answer 9

What determines these patterns of production?

Question 10

What, How, and For Whom? how

Answer 10

Goods and services are produced by using productive resources that economists call factors of production.

Question 11

Factors of production are grouped into four categories:

Answer 11

Land
Labour
Capital
Entrepreneurship

Question 12

land

Answer 12

The “gifts of nature” that we use to produce goods and services

Question 13

Labour

Answer 13

The work time and work effort that people devote to producing goods and services

Question 14

human capital

Answer 14

The quality of labour depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.

Question 15

capital

Answer 15

The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services

Question 16

entrepreneurship

Answer 16

The human resource that organizes land, labour, and capital

Question 17

For Whom?

Answer 17

Who gets the goods and services depends on the incomes that people earn.
Land earns rent.
Labour earns wages.
Capital earns interest.
Entrepreneurship earns profit.

Question 18

Self-Interest

Answer 18

You make choices that are in your self-interest—choices that you think are best for you.

Question 19

Social Interest

Answer 19

Choices that are best for society as a whole are said to be in the social interest.
Social interest has two dimensions:
Efficiency
Equity

Question 20

efficient

Answer 20

Resource use is efficient if it is not possible to make someone better off without making someone else worse off.

Question 21

Equity

Answer 21

Equity is fairness, but economists have a variety of views about what is fair.

Question 22

Six key ideas define the economic way of thinking:

Answer 22

A choice is a tradeoff.
People make rational choices by comparing benefits and costs.
Benefit is what you gain from something.
Cost is what you must give up to get something.
Most choices are “how-much” choices made at the margin.
Choices respond to incentives.

Question 23

A Choice Is a Tradeoff

Answer 23

You can think about every choice as a tradeoff—an exchange—giving up one thing to get something else.
On Saturday night, will you study or have fun?
You can’t study or have fun at the same time, so you must make a choice.
Whatever you choose, you could have chosen something else. Your choice is a tradeoff.

Question 24

Making a Rational Choice

Answer 24

A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice.
Only the wants of the person making a choice are relevant to determine its rationality.
The idea of rational choice provides an answer to the first question: What goods and services will be produced and in what quantities?
The answer is: Those that people rationally choose to buy!

Question 25

Benefit: What you Gain

Answer 25

The benefit of something is the gain or pleasure that it brings and is determined by preferences
Preferences are what a person likes and dislikes and the intensity of those feelings.

Question 26

Cost: What you Must Give Up

Answer 26

The opportunity cost of something is the highest-valued alternative that must be given up to get it.
What is your opportunity cost of going to an AC/DC concert?
Opportunity cost has two components:
The things you can’t afford to buy if you purchase the AC/DC ticket.
The things you can’t do with your time if you go to the concert.

Question 27

How Much? Choosing at the Margin

Answer 27

You can allocate the next hour between studying and instant messaging your friends.
The choice is not all or nothing, but you must decide how many minutes to allocate to each activity.
To make this decision, you compare the benefit of a little bit more study time with its cost—you make your choice at the margin.

Question 28

marginal benefit.

Answer 28

The benefit from pursuing an incremental increase in an activity

Question 29

marginal cost.

Answer 29

The opportunity cost of pursuing an incremental increase in an activity

Question 30

Choices Respond to Incentives

Answer 30

A change in marginal cost or a change in marginal benefit changes the incentives that we face and leads us to change our choice.
The central idea of economics is that we can predict how choices will change by looking at changes in incentives.
Incentives are also the key to reconciling self-interest and the social interest.

Question 31

Economists distinguish between two types of statement:

Answer 31

Positive statements—what is
Normative statements—what ought to be
A positive statement can be tested by checking it against facts.
A normative statement expresses an opinion and cannot be tested.