Chapter 1

Question 1

Economics

Answer 1

the study of the choices that society makes given the scarce resources avilable

Question 2

Choice

Answer 2

• What gets produced? What goods and services?
• How is it produced? What production techniques are used?
• Who gets what is produced? Distribution of goods and services throughout society

Question 3

Scarcity

Answer 3

the notion that there are unlimited wants but resources are limited; How does society deal with that?

Question 4

Why study economics?

Answer 4

• to understand society & economic decisions that are made influence society
• to learn a way of thinking
• to understand global affairs to better understand relationships between countries
• to be a more informed citizen

Question 5

People are rational

Answer 5

we assume people make decisions using all available information

Question 6

People respond to economic incentives

Answer 6

money talks; bank robbery example: take risk of getting robbed over hiring a body guard

Question 7

Optimal decisions are made at the margin

Answer 7

• a marginal change refers to a small incremental change in the total; ie: marginal cost = small change in the total cost
• optimal decision making tells us that an activity will continue until marginal cost = marginal benefit

Question 8

Sunkcosts

Answer 8

• costs that cannot be avoided b/c they have already been incurred; ie. desk clerk at a hotel still going to work regardless if a room gets rented
• sunkcosts are irrevelant to decision making

Question 9

Opportunity Cost

Answer 9

• the next best alternative that we forgo when we make a decision; does not refer to the sum of all alternatives, just the next best alternative
• the total cost includes the implicit or opportuniy cost + the explicit cost (ie. cost to go to Saint Anselm College for 1 year)

Question 10

Trade-offs

Answer 10

every decision that we make involves giving up something else b/c we face scarcity

Question 11

Centrally Planned Economy

Answer 11

government makes all decisions; ie. North Korea; not very successful in producing low cost high quality goods which results in low standard of living

Question 12

Market Economy

Answer 12

households and firms make decisions; not the government

Question 13

Mixed Economy

Answer 13

households, firms and government all plays a role in decisions

Question 14

Efficiency

Answer 14

society getting the most that it can from its scarce resources; markets are generally efficient b/c they tend to promote competition and voluntary exchange

Question 15

Voluntary Exchange

Answer 15

the buyer and seller are both made better off by the transaction

Question 16

Productive Efficiency

Answer 16

results when goods and services are produced at the lowest possible cost

Question 17

Allocative Efficiency

Answer 17

production occurs in accordance with consumer preferences; the goods and services consumers want to buy

Question 18

Equity

Answer 18

fair distribution of economic benefits; fairness (which is difficult to define & lies in the eye of the beholder) by promoting equity can reduce efficiency

Question 19

Microeconomics

Answer 19

examines the functioning of the individual firm and individual decision making units

Question 20

Macroeconomics

Answer 20

examines the functioning of the aggregates; the sum of everything; birds eye view

Question 21

Positive Economics

Answer 21

Seeks to explain the behavior and function of systems without making judgments; describes what is and how it works (no judgments); fact

Question 22

Normative Economics

Answer 22

seeks to analyze behavior; examines and prescribes what ought to be; does impart judgement; opinion; “we should”

Question 23

Economic Models

Answer 23

simplified versions of reality; take away extra detail; 3 forms=words, equations, graphs

Question 24

Economic Policy Objectives

Answer 24

efficiency, equity, growth and stability

Question 25

Growth

Answer 25

increase in national output

Question 26

Stability

Answer 26

National output grows steadily with resources operating in full employment

Question 27

Ceteris Paribus

Answer 27

“all else being equal”