Chapter 2: Some Tools of the Economist

Question 1

When individuals engage in a voluntary exchange…

Answer 1

…both parties are made better off.

Question 2

Trade creates…

Answer 2

…value.

Question 3

Transaction costs

Answer 3

The time, effort, and other resources needed to search out, negotiate, and complete an exchange.

Question 4

Middlemen

Answer 4

People who buy and sell goods or services or arrange trades. A middleman reduces transaction costs.

Question 5

Property rights

Answer 5

The rights to use, control, and obtain the benefits from a good or resource.

Question 6

Private-property rights

Answer 6

Property rights that are exclusively help by an owner and protected against invasion by others Private property can be transferred, sold, or mortgaged at the owner’s discretion.

Question 7

Production possibilities curve

Answer 7

A curve that outlines all the possible combinations of total output that could be produced, assuming (1) a fixed amount of productive resources, (2) a given amount of technical knowledge, and (3) full and efficient use of those resources. The slope of the curve indicates the amount of one product that must be given up to produce more of the other.

Question 8

What makes the production possibilities curve concave form the origin?

Answer 8

Increasing opportunity costs

Question 9

Investment

Answer 9

The purchase, construction, or development of resources, including physical assets, such as plants and machinery, and human assets, such as better education. Investment expands an economy’s resources. The process of investment is sometimes called capital formation.

Question 10

Technology

Answer 10

The technological knowledge available in an economy at any given time. The level of technology determines the amount of output we can generate with our limited resources.

Question 11

Invention

Answer 11

The creation of a new product or process, often facilitated by the knowledge of engineering and science.

Question 12

Innovation

Answer 12

The successful introduction and adoption of a new product or process; the economic application of inventions and marking techniques.

Question 13

Entrepreneur

Answer 13

A person who introduces new products or improved technologies and decides which projects to undertake. A successful entrepreneur’s actions will increase the value of resources and expand the economic pie.

Question 14

Creative destruction

Answer 14

The replacement of old products and production methods by innovative new ones that consumers judge to be superior. The process generates economic growth and higher living standards.

Question 15

Division of labor

Answer 15

A method that breaks down the production of a product into a series of specific tasks, each performed by a different worker.

Question 16

Law of comparative advantage

Answer 16

A principle that states that individuals, firms, regions, or nations can gain by specializing in the production of goods that they produce cheaply (at a low opportunity cost) and exchanging them for goods they cannot produce cheaply (at a high opportunity cost).

Question 17

Market organization

Answer 17

A method of organization in which private parties make their own plans and decisions with the guidance of unregulated market prices. The basic economic questions of consumption, production, and distribution are answered through these decentralized decisions.

Question 18

Capitalism

Answer 18

An economic system in which productive resources are owned privately and goods and resources are allocated through market prices.

Question 19

Collective decision-making

Answer 19

The method of organization that relies on a public-sector decision-making (voting, political bargaining, lobbying, and so on) to resolve basic economic questions.

Question 20

Socialism

Answer 20

A system of economic organization in which (1) the ownership and control of the basic means of production rest with the state and (2) resource allocation is determined by centralized planning rather than market forces.