Chapter 1

Question 1

what is economics?

Answer 1

study of the use of scarce resources to satisfy unlimited human wants

Question 2

what are some issues that economics might address?

Answer 2

• productivity growth
• population aging
• climate change
• global financial stability
• rising government debt
• globalization

Question 3

define factors of production

Answer 3

resources used to produce goods and services; frequently divided into the basic categories of land, labour and capital

Question 4

define goods

Answer 4

tangible commodities such as cars or shoes

Question 5

define services

Answer 5

intangible commodities such as haircuts or medical care

Question 6

define production

Answer 6

the act of making goods or services

Question 7

define consumption

Answer 7

the act of using goods or services to satisfy wants

Question 8

scarcity implies…

Answer 8

that choices must be made, and choices implies the existence of costs

Question 9

define opportunity cost

Answer 9

the cost of using resources for a certain purpose, measured by the benefit given up by not using them in their best alternative use

Question 10

define a production possibility boundary

Answer 10

a curve showing which alternative combinations of commodities can just be attained if all available resources are used efficiently. it is the boundary between attainable and unattainable output combinations

Question 11

what concepts are illustrated by a production possibilities boundary?

Answer 11

scarcity, choice, and opportunity cost

Question 12

what are the four key economic problems?

Answer 12

• what is produced and how
• what is consumed and by whom
• why are resources sometimes idle?
• is productive capacity growing?

Question 13

an economy based on free-market transactions is ___________

Answer 13

self-organizing

Question 14

define efficiency

Answer 14

producing as much goods/services as the people want with the least possible amount of resources

Question 15

what are the three main groups of decision-makers?

Answer 15

consumers, producers, government

Question 16

define utility

Answer 16

total satisfaction received from consuming a good or service

Question 17

individuals try to maximize _____ while producers try to maximize _____

Answer 17

utility; profits

Question 18

define marginal cost

Answer 18

cost of producing one more unit of a good

Question 19

define marginal benefit

Answer 19

maximum that a consumer’s willing to pay for an additional good/service

Question 20

define specialization of labour

Answer 20

the specialization of individual workers in the production of particular goods or services

Question 21

define division of labour

Answer 21

breaking up of a production process into a series of specialized tasks, each done by a different worker

Question 22

define a barter system

Answer 22

when goods and services are traded directly for other goods and services

Question 23

why is money beneficial?

Answer 23

it eliminates the complications of a barter system by separating the transactions involved in the exchange of products

Question 24

what is globalization?

Answer 24

increased importance of international trade

Question 25

define a traditional economy

Answer 25

an economy in which behavior is based mostly on tradition

Question 26

define a command economy

Answer 26

an economy in which most economic decisions are made by a central planning authority

Question 27

define a free-market economy

Answer 27

an economy in which most economic decisions are made by private households

Question 28

define a mixed economy

Answer 28

an economy in which some economic decisions are made by firms and households and some by the government

Question 29

in practice, every economy is a _____ economy

Answer 29

mixed; in the sense that it combines significant elements of all 3 systems in determining economic behaviour

Question 30

what are two key institutions in a mixed economy?

Answer 30

private property and freedom of contract

Question 31

what does a government do in a mixed economy?

Answer 31

creates laws of ownership and contract and then provides the institutions, such as police and courts to enforce these laws