Chapter 1

Question 1

Scarcity

Answer 1

The limited nature of society’s resources.

Question 2

Economics

Answer 2

The study of how society manages its scarce resources.

Question 3

3 Aspects of Economic Study

What do economists study?

Answer 3

(1) How people make decisions
(2) How people interact
(3) The forces and trends that affect the entire economy

Question 4

Principle #1

Answer 4

People face trade-offs.

Obtaining something that we like requires us to give up another thing that we also like.

Question 5

Principle #2

Answer 5

Opportunity Cost: The cost of an item/resource/goal is what is given up (paid) to obtain it.

Question 6

Efficiency

Answer 6

The situation in which society receives the most it can from its scarce resources.

Question 7

Equality

Answer 7

The situation in which economic prosperity is distributed uniformly among the members of society.

Question 8

Principle #3

Answer 8

Rational people think at the margin.

Question 9

Rational People

Answer 9

People who systematically and purposefully do the best they can to achieve their objectives.

Question 10

Marginal Change

Answer 10

A small incremental adjustment to an existing plan of action.

Question 11

Principle #4

Answer 11

People respond to incentives.

Question 12

Principle #5

Answer 12

Trade can make everyone better off.

Question 13

Principle #6

Answer 13

Markets are usually a good way to organize economic activity.

Question 14

Incentive

Answer 14

Any thing/idea/experience that induces a person to act.

Question 15

Market Economy

Answer 15

An economy that allocates resources through the decentralized decisions of many firms and households as they interacts in markets for goods and services.

Question 16

Property Rights

Answer 16

The ability of an individual to own and exercise control over scarce resources.

Question 17

2 Reasons for a Government to Intervene in an Economy

Answer 17

(1) To promote efficiency

(2) To promote equality

Question 18

Market Failure

Answer 18

A situation in which a market left on its own fails to allocate resources efficiently.

Question 19

Externality

Answer 19

The impact of one person’s actions on the wellbeing of a bystander.

Question 20

Market Power

Answer 20

The ability of a single economic actor (or a small group of actors) to exercise substantial influence over market prices.

Question 21

Principle #7

Answer 21

Governments can sometimes improve market outcomes.

Question 22

Principle #8

Answer 22

A country’s standard of living depends on its ability to produce goods and services.

Question 23

Productivity

Answer 23

The quantity of goods and services produced from each unit of labor input.

Question 24

Principle #9

Answer 24

Prices rise when the government prints too much money.

Question 25

Inflation

Answer 25

An increase in the overall level of prices in an economy.

Question 26

Principle #10

Answer 26

Society faces a short-run trade-off between inflation and unemployment. (Higher levels of inflation lead to lower levels of unemployment.)

Question 27

Business Cycle

Answer 27

The irregular and unpredictable fluctuations in economic activity (such as variations in the levels of production or unemployment).