Chapter 17: Introduction to Economics

Question 1

What is economics?

Answer 1

Economics is the study of how people and governments use limited resources to satisfy unlimited wants.

Question 2

What do a nation’s resources include?

Answer 2

A nation’s resources include natural resources, human resources (labor), and capital resources (capital).

Question 3

Regarding goods and services, what must each country decide?

Answer 3

Each country must decide which goods and services to produce, how to distribute goods and services, and who will use the goods and services.

Question 4

How are economic questions answered in a traditional economy?

Answer 4

In a traditional economy, economic questions are answered by custom.

Question 5

How are economic questions answered in a market economy?

Answer 5

In a market economy, economic questions are answered by individuals and businesses.

Question 6

How are economic questions answered in a command economy?

Answer 6

In a command economy, economic questions are answered by planners who work for the government.

Question 7

What kind of economy does the United States have?

Answer 7

The United States has a mixed market economy in which individuals and businesses make economic decisions that are limited by some government regulation.

Question 8

When choosing how to spend time or money, what are trade-offs?

Answer 8

When choosing how to spend time or money, individuals and nations make trade-offs by giving up one choice in favor of another.

Question 9

What are opportunity costs?

Answer 9

Opportunity cost is the cost of giving up the next best use of time or money.

Question 10

What are fixed costs?

Answer 10

Businesses have fixed costs, such as rent and insurance, that do not change no matter how much the business produces.

Question 11

What are variable costs?

Answer 11

Businesses have variable costs, such as labor and supplies, that change depending how much the business produces.

Question 12

In order to make a decision about whether or not to increase output, what do businesses compare?

Answer 12

To make a decision about whether to increase output, businesses compare the increased cost (marginal cost) to the increased revenue (marginal revenue).

Question 13

What is marginal analysis, and why do businesses use it?

Answer 13

Marginal analysis compares the added benefit of doing something with the added cost of doing it. Businesses use marginal analysis to make simple, either/or decisions.

Question 14

What is benefit-cost analysis, and why do businesses use it?

Answer 14

Benefit-cost analysis compares the size of the benefit with the size of the cost by dividing the two. Businesses use benefit-cost analysis when making more complex decisions.

Question 15

In a market economy, how are prices set?

Answer 15

In a market economy, prices are set based on the interaction of demand and supply.

Question 16

What is “demand” in a market economy?

Answer 16

Demand is the amount of a good or service that people are willing and able to buy at a certain price.

Question 17

What is “supply” in a market economy?

Answer 17

Supply is the amount of a good or service that producers are willing and able to sell at various prices during a given time period.

Question 18

In a market economy, what affects supply?

Answer 18

Supply is affected by the number of suppliers and the cost of production.

Question 19

In a market economy, what happens when supply and demand are balanced?

Answer 19

When supply and demand are balanced, the result is an equilibrium price.

Question 20

In a market economy, what is the function of prices?

Answer 20

In a market economy, prices set the value of goods and services and serve as signals between buyers and sellers.

Question 21

Who or what sets prices in a command economy?

Answer 21

In a command economy, the government sets prices based on its idea of the relative value of goods and services.

Question 22

Explain the four parts of demand in a market economy.

Answer 22

1. Amount: how much of a good or service consumers will buy.
2. Willingness to buy: If consumers are not willing to buy a good or service, then there is no demand.
3. Ability to buy: If consumers do not have the money, they cannot buy the good or service.
4. Price: this affects how much consumers buy.

Question 23

Explain the role of consumers and producers in a market economy.

Answer 23

In a market economy, consumers are the people who buy goods and services and producers are businesses that provide them.

Question 24

what affects demand in a market economy?

Answer 24

What affects demand in a market economy are the number of consumers, changes in consumers’ income, and changes in consumers’ preferences (what consumers like and dislike).

Question 25

In a market economy, will the price of a particular good or service go up or down when there is a surplus of that good or service? Explain.

Answer 25

In a market economy, a surplus of a particular good or service will cause the price to go down because businesses must lower the price in order to increase consumer demand.