Chapter 1

Question 1

What is the first principle of economics?

Answer 1

This is that people try to optimize. They try to choose the best available option.

Question 2

What is the second principle of economics?

Answer 2

This is that economic systems tend to be in equilibrium, a situation in which no party would benefit by changing his or her behaviour.

Question 3

What is the third principle of economics?

Answer 3

This is empiricism (analysis that uses data). Economists use data to test theories and to determine what is causing things to happen.

Question 4

What is an economic agent?

Answer 4

This is an individual or group that makes choices.

Question 5

What are scarce resources?

Answer 5

Scarce resources are things that people want, where the quantity that people want exceeds that quantity available.

Question 6

What is scarcity?

Answer 6

Scarcity exists because people have unlimited wants in a world of limited resources.

Question 7

What is economics?

Answer 7

Economics is the study of how agents choose to allocate scarce resources and how those choices affect society.

Question 8

What is positive economics?

Answer 8

Positive economics describes what people actually do.

Question 9

What is normative economics?

Answer 9

Normative economics recommends what people ought to do.

Question 10

What is microeconomics?

Answer 10

Microeconomics is the study of how individuals, households, firms and governments make choices, and how those choices affect prices, the allocation of resources and the well being of other agents.

Question 11

What is macroeconomics?

Answer 11

Macroeconomics is the study of the economy as a whole. Macroeconomists study economy wide phenomena, like the growth rate of a country’s total economic output, the inflation rate, or the unemployment rate.

Question 12

What is optimisation?

Answer 12

Optimisation is trying to choose the best feasible option, given the available information.

Question 13

What is an equilibrium?

Answer 13

Equilibrium is the special situation in which everyone is simultaneously optimising, so nobody would benefit personally by changing his or her behaviour.

Question 14

What is empiricism?

Answer 14

Empiricism is analysis that uses data. economists use data to test theories and to determine what is causing things to happen to the world.

Question 15

What is a trade off?

Answer 15

An economic agent faces a trade off when the agent needs to give up on thing to get something else.

Question 16

What is a budget constraint?

Answer 16

A budget constraint shows the bundles of goods or services that a consumer can choose given her limited budget.

Question 17

What is an opportunity cost?

Answer 17

Opportunity cost is the best alternative use of a resource.

Question 18

What is the cost-benefit analysis?

Answer 18

The cost-benefit analysis is a calculation that adds up costs and benefits using a common unit of measurement, like dollars.