Chapter 1

Question 1

What is economics?

Answer 1

Economics is the study of how people allocate their limited resource to satisfy their practically unlimited wants.

Question 2

What are five foundations of economics?

Answer 2

1. Incentives
2. Trade-offs
3. Opportunity costs
4. Marginal thinking
5. Trade

Question 3

What is a circular flow diagram?

Answer 3

A circular flow diagram shows how goods, service, and resources flow through the economy.

Question 4

What is comparative advantage?

Answer 4

Comparative advantage refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can.

Question 5

What is economic thinking?

Answer 5

Economic thinking requires a purposeful evaluation of the available opportunities to make the best decision possible.

Question 6

What are incentives?

Answer 6

Incentives are factors that motivate a person to act or exert effort.

Question 7

What is macroeconomics?

Answer 7

Macroeconomics is the study of the verbal aspects and workings of an economy.

Question 8

What does marginal thinking require?

Answer 8

Marginal thinking requires decision-making to evaluate whether the enfitéutico of one or more unit of something is greater than its cost.

Question 9

What do markets do?

Answer 9

Markets bring buyers and seller together to exchange goods and services.

Question 10

What is microeconomics?

Answer 10

Microeconomics is the study of the individual units that make up the economy.

Question 11

What is opportunity cost?

Answer 11

Opportunity cost is the highest-valued alternative that must be sacrificed to get something else.

Question 12

What is scarcity?

Answer 12

Scarcity refers to the the inherently limited nature of society’s resources, given society’s unlimited wants and needs.

Question 13

What is trade?

Answer 13

Trade is the voluntary exchange of goods and services between two or more parties.

Question 14

You learn you can resell a ticket to net week’s homecoming game for twice what you paid. How does incentive impact this situation?

Answer 14

Because your tickets are worth more than you paid for them, you have a direct positive incentive to resell them

Question 15

A state government announces a “sales tax holiday” for back-to-school shopping during one week each August. How does incentive impact this situation?

Answer 15

The “sales tax holiday” is a direct positive incentive to buy more clothes during the back-to-school period. An unintended consequences of this policy is that fewer purchases are likely to be made both before and after the tax holiday.

Question 16

Why are indirect incentives more difficult to recognize than direct incentives? Give examples.

Answer 16

An indirect incentive is more difficult to recognize because it is usually the
unintended consequence of a direct incentive. One example would be lowering gas prices. Drivers may unintentionally decide to travel more than they use to because of the low price of gas. Another example would be unemployment benefits provided by the government. This might provide the unemployed with incentive NOT to actively look for employment.

Question 17

Which of the following statements about opportunity cost is correct?
A. Going to college is typically not considered an opportunity cost.
B. It is the lowest valued alternative that must be sacrificed.
C. It is the highest valued alternative that must be sacrificed.
D. It requires decision-makers to evaluate whether the benefit of one or more unit of something is greater than the cost.

Answer 17

C. It is the highest valued alternative that must be sacrificed.

Question 18

Name four things that would be included in a circular flow.

Answer 18

Goods
Services
Resources
Money

Question 19

True or false: comparative advantage refers to the situation where an individual, business, or country can produce at lower opportunity cost than a competitor can.

Answer 19

True

Question 20

True or false: comparative advantage requires a decision-maker to weigh the extra benefits against the extra cost.

Answer 20

False. Marginal thinking requires decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost.