Chpater 1

Question 1

Economics

Answer 1

Economics is a social science concerned with making optimal choices under conditions of scarcity.

Economic wants exceed society’s productive capacity

Question 2

The Economic Perspective

Answer 2

A view point that envisions individuals and institutions making rational decisions in their own self interest. It considers:
Scarcity and choice
Opportunity Cost
Purposeful behavior to increase utility
Marginal analysis by comparing the marginal benefits
and marginal costs

Question 3

Scarcity and Choice

Answer 3

Resources are scarce.
Choices must be made.
Opportunity cost.
There is no free lunch.

Question 4

Purposeful Behavior

Answer 4

Rational self-interest.
Individuals and utility.
Firms and profit.
Desired outcome.

Question 5

Marginal Analysis

Answer 5

The comparison of marginal benefits and marginal cost usually for decision making.
Marginal means “extra” or “additional.”

Question 6

Theories, Principals, and Models

Answer 6

The scientific method is the procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation of testing hypotheses to obtain theories, principles, and laws.
It consists of several elements:
- Observe
-Formulate a hypothesis
-Test the hypothesis
-Accept,reject or modify the hypothesis
-Continue to test the hypothesis, if necessary

Question 7

Economic Principles

Answer 7

Generalizations

Other-things-equal-assumption: The assumption that factors other than those being considered did not change (Also called the “ceteris paribus assumption”

Graphic expression

Question 8

Microeconomics and Macroeconomics

Answer 8

Microeconomics: The study of the individual consumer, firm, or market.
Macroeconomics: The study of the entire economy or major aggregate of the economy

Question 9

Positive and Normative

Answer 9

Positive Economics: Economics statements that are factual.

Normative Economics: Economic statements that involve value judgements.

Question 10

The Economizing Problem

Answer 10

The Econcomic Problem: Limited income and unlimited wants.

The Budget Line:
-Attainable and unattainable combinations.
-Trade-Offs and opportunity cost.
-Choice
-Income changes

Question 11

Society’s Economizing Problem

Answer 11

Economic Resources:

1. Land**: Includes all natural resources used in the production process.
2. Labor**: Physical actions and mental activities that people contribute to production
3. Capital (investment)**: All human-produced physical objects and intangible ideas used in production
4. Entrepreneurial ability**: Special human resource distinct from labor

Question 12

Functions of Entrepreneurs

Answer 12

Employ the other factors of production

Take initiative

Make strategic business decisions

Innovate

Take risk

Question 13

Production Possibilities Model Overview:

Answer 13

An economic model that shows different combinations of two goods that an economy can produce.

Assumptions:
-Full employment
-Fixed resources
-Two goods
1 consumer goods
2 capital goods

Question 14

Increasing Opportunity Costs

Answer 14

Law of increasing opportunity costs: As more of a particular good is produced, its marginal opportunity costs increase

Production possibilities curve

-Concave shape
-Economic rationale

Question 15

International Trade

Answer 15

Specialization

Increased production possibilities

Question 16

Last Word: Pitfalls to Sound Economic Reasoning

Answer 16

Common pitfalls to avoid in successfully applying the economic perspective:
1. Biases
2. Loaded Terminology
3. Fallacy of Composition
4. Post Hoc Fallacy
5. Correlation but Not Causation