Intro - Chptr 1

Question 1

Define: Economics

Answer 1

The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.

Question 2

“Coordination” of individuals’ wants & desires in the field of economics refers to three central problems:

Answer 2

(1) What, and how much, to produce
(2) How to produce it
(3) For whom to produce it

Question 3

Scarcity (Define)

Two elements of scarcities?

Answer 3

The goods available are too few to satisfy individuals’ desires.
Two elements: (1) our wants & (2) our means of fulfilling those wants.

Question 5

Coordination of wants & desires in all known economies involves some type of coercion, e.g.

Answer 5

(1) Limiting people’s wants

(2) Increasing the amount of work individuals are willing to do to fulfill those wants

Question 6

Economic reasoning is making decisions on the basis of:

Answer 6

Assessing the cost & benefits of a decision.

Question 7

Marginal cost

Answer 7

The additional cost to you over and above the costs you have already incurred.

Question 8

Marginal benefit

Answer 8

The additional benefit above what you’ve already derived.

Question 9

Sunk cost

Answer 9

Costs that have already been incurred and cannot be recovered.

Question 10

Economic decision rule:

Answer 10

If the marginal benefits of doing something exceed the marginal costs, do it.

If the marginal costs of doing something exceed the marginal benefits, don’t do it.

Question 11

Opportunity cost

Answer 11

The benefit forgone by undertaking an activity; the value of the next-best alternative to the alternative selected

Question 13

Economic reality is controlled by three forces:

Answer 13

(1) Economic forces (necessary reactions to scarcity)
(2) Social and cultural forces
(3) Political and legal forces

Question 14

Market force

Answer 14

An economic force that is given relatively free rein by society to work through the market.

Question 15

Examples of early classical economists:

Answer 15

Adam Smith, Thomas Malthus, John Stuart Mill, David Ricardo, Karl Marx

Question 16

Marshallian economics

Answer 16

Primarily about policy, not theory. Sees economics as an engine of analysis used to understand real-world phenomena. Sees institutions as well as political and social dimensions of reality as important. Alfred Marshall, “Principles of Economics,” published late 1800s.

Question 17

Economic theories

Answer 17

Generalizations about the workings of an abstract economy

Question 18

Economic model

Answer 18

A framework that places the generalized insights of a theory in a more specific contextual setting.

Question 19

Economic principle

Answer 19

A commonly held economic insight stated as a law or general assumption.

Question 20

Pricing mechanism

Answer 20

When quantity supplied > than the quantity demanded, price has a tendency to fall.

When quantity demanded > than the quantity supplied, price has a tendency to rise.

Question 21

Invisible hand theory

Answer 21

A market economy, through the price mechanism, will tend to allocate resources efficiently.

Question 22

Microeconomics

Answer 22

The study of how individual choice is influenced by economic forces. Eg: how a specific market price is determined and the quantity sold.

Question 23

Macroeconomics

Answer 23

The study of the economy as a whole. It considers the problems of inflation, unemployment, business cycles, and growth.

Question 24

Positive economics

Answer 24

The study of what is, and how the economy works.

Question 25

Normative economics

Answer 25

The study of what the goals of the economy should be.

Question 25

Relative scarcity

Answer 25

If we reduce our wants, scarcity will fall
If we increase our efforts to produce more goods or if technological changes allow people to produce more using the same resources, scarcity will fall.

Question 26

The art of economics

Answer 26

The application of the knowledge learned in positive economics to the achievement of the goals determined in normative economics.

Question 26

What is the importance of opportunity cost to economic reasoning?

Answer 26

It is the basis of cost/benefit economic reasoning. It takes into account benefits of all other options, and converts these alternative benefits into costs of the decision you’re now making. In economic reasoning, OC will be < the benefit of what you have chosen.

Question 27

Economic force

Answer 27

Necessary reaction to scarcity. All scarce goods must be rationed in some way. If an economic force is allowed to work through the market, that economic force becomes a market force. The invisible hand is the price mechanism.