Chapter 1

Question 1

economy

Answer 1

• a system for coordinating society’s productive activities

Question 2

economics

Answer 2

• the social science that studies the production, distribution, and consumption of goods and services

Question 3

market economy

Answer 3

• an economy in which decisions about production and consumption are made by individual producers and consumers

Question 4

command economy

Answer 4

• there is a central authority making decisions about production and consumption
• alternative to a market economy

Question 5

Wealth of Nations

Answer 5

• Adam Smith said that people pursuing their own interests often end up serving the interests of society as a whole

Question 6

invisible hand

Answer 6

• refers to the way in which the individual pursuit of self-interest can lead to good results for society as a whole

Question 7

microeconomics

Answer 7

• the branch of economics that studies how people make decisions and how these decisions interact

Question 8

Market failure

Answer 8

• When the individual pursuit of self-interest leads to bad results for society as a whole

Question 9

fluctuations

Answer 9

• a series of ups and downs

Question 10

recessions

Answer 10

• a downturn in the economy

Question 11

macroeconomics

Answer 11

• concerned with the overall ups and downs of the economy

Question 12

economic growth

Answer 12

• the growing ability of the economy to produce goods and services

Question 13

economic interaction

Answer 13

• how my choices affect your choices, and vice versa

Question 14

individual choice

Answer 14

• decisions by an individual about what to do and what not to do

Question 15

resource

Answer 15

• anything that can be used to produce something else
  
  • land
  • labor
  • capital
  • human capital

Question 16

scarce

Answer 16

• when there’s not enough of the resource available to satisfy all the various ways a society wants to use it.

Question 17

opportunity cost

Answer 17

• what you must give up in order to get an item you want

Question 18

“how much” decision

Answer 18

• is made at the margin

Question 19

tradeoff

Answer 19

• a comparison of costs and benefits

Question 20

marginal decisions

Answer 20

• decisions about whether to do a bit more or a bit less of an activity

Question 21

marginal analysis

Answer 21

• the study of marginal decisions

Question 22

incentive

Answer 22

• anything that offers rewards to people who change their behavior

Question 23

interaction

Answer 23

• my choices affect your choices, and vice versa

Question 24

principles that underlie the interaction of individual choices

Answer 24

1. there are gains from trade
2. markets move toward equilibrium
3. resources should be used as efficiently as possible to achieve society’s goals
4. Markets usually lead to efficiency
5. When markets don’t achieve efficiency, government intervention can improve society’s wealth

Question 25

trade

Answer 25

• provide goods and services to others and receive goods and services in return
• the key to a much better standard of living

Question 26

gains from trade

Answer 26

• people can get more of what they want through trade than they could if they tried to be self-sufficient

Question 27

specialization

Answer 27

• each person specializes in the task that he or she is good at performing
• the economy can produce more when each person specializes
• it is to everyone’s advantage to specialize

Question 28

equilibrium

Answer 28

• an economic situation when no individual would be better off doing something diferent

Question 29

measure that economists truly care about

Answer 29

• people’s happiness and welfare

Question 30

efficient

Answer 30

• takes all opportunities to make some people better off without making other people worse off

Question 31

equity

Answer 31

• everyone gets his or her fair share
• there is typically a trade-off between equity and efficiency
• policies that promote equity often come at a cost of decreased efficiency in the economy

Question 32

market failure

Answer 32

• the individual pursuit of self-interest found in markets make society worse off
• market outcome is insufficient

Question 33

Principles that underlie economy-wide interaction

Answer 33

1. one person’s spending is another person’s income
2. overall spending sometimes gets out of line with the economy’s productive capacity
3. government policies can change spending

Question 34

inflation

Answer 34

• a rise in prices throughout the economy

Question 35

Tools of macroeconomic policy

Answer 35

• government spending
• taxes
• control of money