Chapter 1: The Economic Approach

Question 1

Scarcity

Answer 1

Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like.

Question 2

Choice

Answer 2

The act of selecting among alternatives. It is the logical consequence of scarcity.

Question 3

Resources

Answer 3

Inputs used to produce economic goods.

Question 4

What are the three general categories of resources?

Answer 4

Human resources, physical resources, and natural resources

Question 5

Examples of human resources

Answer 5

Productive knowledge, skill, and strength of human beings

Question 6

Examples of physical resources

Answer 6

Tools, machines, and buildings

Question 7

Examples of natural resources

Answer 7

land, mineral deposits, oceans, and rivers

Question 8

What other term is often used as a synonym for “physical resources?”

Answer 8

Capital

Question 9

Objective

Answer 9

A fact based on observable phenomena that is not influenced by differences in personal opinion.

Question 10

Subjective

Answer 10

An opinion based on personal preference and value judgements.

Question 11

Rationing

Answer 11

Allocating a limited supply of a good or resource among people who would like to have more of it. When price performs the rationing function, the good or resource is allocated to those willing to give up the most “other things” in order to get it.

Question 12

Economic theory

Answer 12

A set of definitions, postulates, and principles assembled in a manner that makes clear the “cause-and-effect” relationships

Question 13

Opportunity cost

Answer 13

The highest valued alternative that must be sacrificed as a result of choosing an option.

Question 14

Economizing behavior

Answer 14

Choosing the option that offers the greatest benefit at the least possible cost.

Question 15

Utility

Answer 15

The subjective benefit or satisfaction a person expects from a choice or course of action.

Question 16

Describe the “incentives matter” postulate of economics.

Answer 16

When the payoff derived from a choice increases, people will be more likely to choose it. Similarly, as the option becomes more costly, less is chosen.

Question 17

Marginal

Answer 17

Term used to describe the effects of a change in the current situation. For example, a producer’s marginal cost is the cost of producing an additional unit of a product, given the producer’s current facility and production rate.

Marginal analysis: “How much more is the price off this item than the price of that item?” The marginal cost is the “more” you would be paying while the marginal benefit is the amount of utility (satisfaction) you would receive from it.

Question 18

Secondary effects

Answer 18

the indirect impact of an vent or policy that may not be easily and immediately observable. Secondary effects are also referred to unintended consequences.

Aspirin’s immediate effect is a bitter taste in one’s mouth while the secondary effect is headache relief.

Question 19

Why is the value of a good or service subjective?

Answer 19

Because preference among individuals greatly vary.

Question 20

Scientific thinking

Answer 20

Developing a theory from basic principles and testing it against events in the real world. Good theories are consistent with and help explain real-world events. Theories that are inconsistent with the real world are invalid and must be rejected.

Question 21

What is a meant when economists refer to a theory as it having “predictive value?”

Answer 21

Simply put, economics are validating the theory.

Question 22

Positive economics

Answer 22

The scientific study of “what is” among economics relationships. It need not be correct; it simply must be testable.

Example: “If the price of gasoline rises, people will buy less gasoline.”

Question 23

Normative economics

Answer 23

Judgments about “what ought to be” in economic matters. Normative economic views cannot be proven false because they are based on judgments. Normative economic statements can neither be confirmed nor proven false by scientific testing.

Example: “Business firms should not be concerned with profits.”

Question 24

Ceteris paribus

Answer 24

A Latin term meaning “other things constant” that is used when the effect of one change is being describe, recognizing that if other things changes, they also could affect the result. Economists often describe the effects of one change, knowing that in the real world, other things might change and also exert an effect.

Question 25

Fallacy of composition

Answer 25

Erroneous view that what is true for the subcomponent will also be true for the whole.

Question 26

Microeconomics

Answer 26

The branch of economics that focuses on how human behavior affects the conduct of affairs within narrowly define units, such as individual households or business firms.

Question 27

Macroeconomics

Answer 27

The branch of economics that focuses on how human behavior affects outcomes in highly aggregated markets, such as the markets for labor or consumer products.