Chapter 1

Question 1

economics

Answer 1

the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society

Question 2

scarcity

Answer 2

the goods available are too few to satisfy individuals’ desires

Question 3

microeconomics

Answer 3

the study of individual choice, and how that choice is influenced by economic forces

Question 4

macroeconomics

Answer 4

the study of the economy as a whole

Question 5

marginal cost

Answer 5

the additional cost to you over and above the costs you have already incurred

Question 6

sunk costs

Answer 6

costs that have already been incurred and cannot be recovered

Question 7

marginal benefit

Answer 7

the additional benefit above what you’ve already derived

Question 8

economic decision rule

Answer 8

If the marginal benefits of doing something exceed the marginal costs, do it.

If the marginal costs of doing something exceed the marginal benefits, don’t do it.

Question 9

opportunity cost

Answer 9

the benefit that you might have gained from choosing the next-best alternative

Question 10

economic forces

Answer 10

the necessary reactions to scarcity

Question 11

market force

Answer 11

an economic force that is given relatively free rein by society to work through the market

Question 12

invisible hand

Answer 12

the price mechanism, the rise and fall of prices that guides our actions in a market

Question 13

economic model

Answer 13

a framework that places the generalized insights of the theory in a more specific contextual setting

Question 14

economic principle

Answer 14

a commonly held economic insight stated as a law or principle

Question 15

experimental economics

Answer 15

a branch of economics that studies the economy through controlled laboratory experiments

Question 16

natural experiments

Answer 16

naturally occurring events that approximate a controlled experiment where something has changed in one place but has not changed somewhere else

Question 17

theorem

Answer 17

propositions that are logically true based on the assumptions in a model

Question 18

precepts

Answer 18

policy rules that conclude that a particular course of action is preferable

Question 19

efficiency

Answer 19

achieving a goal as cheaply as possible

Question 20

invisible hand theorem

Answer 20

a market economy, through the price mechanism, will tend to allocate resources efficiently

Question 21

economic policies

Answer 21

actions (or inaction) taken by government to influence economic actions

Question 22

positive economics

Answer 22

• the study of what is, and how the economy works

- uses empirical facts

Question 23

normative economics

Answer 23

the study of what the goals of the economy should be

Question 24

art of economics

Answer 24

• aka political economy
• the application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics