Chapters 1-3

Question 1

Net Benefits

Answer 1

benefits of choosing an alternative minus costs of choosing alternative

Question 2

Trade-offs

Answer 2

giving up one thing to get something else

Question 3

Externality

Answer 3

cost or benefit caused by one party but financially incurred or received by another.

ex. second hand smoking

Question 5

Models

Answer 5

simplified representation of the world, sometimes referred to as a theory.

Question 6

hypothesis

Answer 6

model’s predictions

Question 7

economics

Answer 7

study of how agents make choices among scarce resources and how those choices affect society

Question 8

macroeconomics

Answer 8

study of economy as a whole; like growth rate of total economic output, inflation rate, or unemployment rate

Question 9

microeconomics

Answer 9

study of how individuals, households, firms, and governments make choices, and how those choices affect prices, allocation of resources, and well beings of other agents

Question 10

marketplace

Answer 10

system where buyers and sellers compete with each other to buy and sell products and services

Question 11

theory

Answer 11

model used to analyze, predict, and understand economic behavior

Question 12

marginal analysis

Answer 12

cost-benefit calculation that studies the difference between feasible alternative and next feasible alternative

focuses on what is changing

Question 13

optimization

Answer 13

choosing best feasible option; given limited info, knowledge, experience and training the agent has

Question 14

positive economics

Answer 14

what people actually do

descriptive

Question 15

normative economics

Answer 15

recommends what people, including society, ought to do

advisory

Question 16

total cost

Answer 16

all costs incurred in producing something or engaging in an activity

Question 17

marginal cost

Answer 17

cost to produce one additional unit of production

Question 18

empiricism

Answer 18

analysis that uses data

Question 19

economic agent

Answer 19

any group or individual that makes choices

• ex. consumers, firms, parents, politicians

Question 20

opportunity cost

Answer 20

best alternative use of a resource

Question 21

3 principles of economics

Answer 21

1. people try to optimize
2. systems tend to be in equilibrium
3. empiricism

Question 22

scarcity

Answer 22

unlimited wants, limited resources

Question 23

free rider problem

Answer 23

when an individual or group is able to enjoy the benefits of a situation without incurring the costs

Question 24

omitted variables

Answer 24

something that has been left out of a study, that if included would explain correlation

Question 25

Good economic questions

Answer 25

1. address topics that are important to individual economic agents and/or to our society
2. can be answered

Question 26

Optimizing using total value

Answer 26

1. translate costs and benefits into common units
2. calculate total net benefit of each alternative
3. pick alternative with highest net benefit

Question 27

optimizing using marginal analysis

Answer 27

1. translate all costs and benefits into common units
2. calculate marginal consequences of moving between alternatives
3. choose best alternative with property that moving to it makes you better and moving away from it makes you worse