Chapter 1

Question 1

What is an economy?

Answer 1

An economy is a system for coordinating society’s
productive activities.

Question 2

Define economics

Answer 2

Economics is the social science that studies the
production, distribution and consumption of goods and
services.

Question 3

What is a market economy?

Answer 3

A market economy is an economy in which decisions
about production and consumption are made by individual
producers and consumers.

Question 4

Who came up with the concept of the “Invisible hand”?

Answer 4

Adam Smith

Question 5

Describe the “Invisible hand”

Answer 5

In essence, the “invisible hand” metaphorically captures the idea that individual self-interest in a free market can inadvertently lead to collective benefits for society. The “invisible hand” represents the self-regulating nature of a free market.

Question 6

Describe “Market failure”

Answer 6

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

Question 7

Describe “Microeconomics”

Answer 7

Microeconomics is the branch of economics that studies
how people make decisions and how these decisions
interact.

Question 8

Describe “Macroeconomics”

Answer 8

Macroeconomics is the branch of economics that is
concerned with the overall ups and downs in the economy

Question 9

What are the 4 principles that influence individual choice?

Answer 9

1. Scarcity of resources
2. Opportunity costs
3. Marginal Decisions
4. Incentives

Question 10

What are 4 examples of resources?

Answer 10

1. Land
2. Labor
3. Capital (machinery, buildings)
4. Human Capital (education, skill)

Question 11

Describe what an opportunity cost is?

Answer 11

An opportunity cost is what you must give up in order to get something.

Question 12

What is a “trade off”?

Answer 12

A comparison of the costs and the benefits of
doing something.

Question 13

What is a marginal decision?

Answer 13

The decision of whether to do more, or less of an activity

Question 14

What is the study of marginal decisions called?

Answer 14

Marginal analysis

Question 15

What is an incentive?

Answer 15

An opportunity that motivates or encourages one to do something.

Question 16

What are the 4 principles that influence how individual choices interact?

Answer 16

1. There are gains from trade
2. Markets move towards equilibrium
3. Resources should be used efficiently to achieve society’s goals
4. Market’s usually lead to efficiency, but when they don’t the government can intervene to improve societies welfare.

Question 17

What are the 3 principles that influence economy wide interactions?

Answer 17

1. One persons spending is another’s income
2. Government policy can change overall spending if it get’s out of line.
3. Increases in an economy’s potential leads to growth over time.