Chapter 1: Principles of Macroeconomics

Question 1

How Individuals make choices

Answer 1

Scarcity
opportunity cost
marginal analysis
incentives

Question 2

Resource

Answer 2

anything that can be used to produce something else (scarce: not enough of a resource to satisfy all ways a society can use it)

Question 3

Economics

Answer 3

the study of how individuals or societies choose to use the limited (scarce) resources to try to satisfy their unlimited wants

Question 4

Economy’s resources

Answer 4

Land, labor, capital (machines) and human capital (education and skill of labor force)

Question 5

Examples of scarce resources

Answer 5

Natural: minerals, lumber, petrol
Human: labor, skill and intelligence
Clean air and water

Question 6

Principle #1:

Answer 6

Choices are necesary because resources are scarce

Question 7

Principle #2:

Answer 7

The “opportunity cost” (what you must give up to get it) of an item is it’s true cost

Question 8

trade-off

Answer 8

a comparison of costs and benefits

Question 9

marginal decisions

Answer 9

whether to do a bit more or less of an activity

Question 10

Principle #3:

Answer 10

“How much” decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus a little bit less

Question 11

Marginal analysis

Answer 11

study of “how much” decisions

Question 12

Principle #4:

Answer 12

People usually respond to incentives exploiting opportunities to make themselves better off.

Question 13

How individual choices interact:

Answer 13

Trade
Gains from trade
Specialization
Equilibrium
Efficiency and equity

Question 14

Principle #5:

Answer 14

There are gains from trade

Question 15

Gains from trade

Answer 15

People get more of what they want than they could get by being self sufficient

Question 16

specialization

Answer 16

the situation in which each person specializes in the task that he or she is good at performing

Question 17

Principle #6:

Answer 17

markets move toward equilibrium

Question 18

Equilibrium

Answer 18

an economic situation in which no individual would be better off doing something different

Question 19

Principle #7:

Answer 19

resources should be used efficiently to achieve society’s goals

Question 20

Efficiency

Answer 20

taking all opportunities to make some people better off without making others worse off

Question 21

Equity

Answer 21

everyone gets his or her fair share; there is typically a trade-off; Equity and efficiency are often at odds.

Question 22

Principle #8:

Answer 22

Markets usually lead to efficiency: people normally take opportunities for mutual gain.

Question 23

Principle #9:

Answer 23

When markets don’t achieve efficiency, government intervention can improve society’s welfare

Question 24

1 Way Markets Fail

Answer 24

Individual actions have side effects that are not properly taken account by the market (causing pollution)

Question 25

2 Way Markets Fail

Answer 25

One party prevents mutually beneficial trades from occurring in an attempt to capture a greater share of the resources for itself (drug company prices a drug higher than the cost of producing it).

Question 26

3 Way markets fail

Answer 26

Some goods, by their very nature, are unsuited for efficient management by markets (air traffic control)

Question 27

Principle #10

Answer 27

One person’s spending is another person’s income

Question 28

Principle #11

Answer 28

Overall spending sometimes gets out of line with the economy’s productive capacity (too little spending can lead to deflation and too much to inflation)

Question 29

Principle #12

Answer 29

Government policies can change spending

Question 30

Microeconomics

Answer 30

study of decision making by individual households and individual firms

Question 31

Macroeconomics

Answer 31

study of nationwide phenomena, such as inflation and unemployment levels