Principles of Economics

Question 1

What is Principle 1?

Answer 1

People Face Trade Offs

Question 2

A concept that states that society has limited resources and therefore cannot produce all the goods and services people wish to have.

Answer 2

Scarcity

Question 3

The study of how society manages its scarce resources

Answer 3

Economics

Question 4

What is a classic trade-off where the society weighs its expenditure on national defense and consumer goods?

Answer 4

“Guns and Butter”

Question 5

Laws that require firms to reduce pollution that raise costs of producing goods and services is an example of a trade-off on?

Answer 5

Clean environment and high level of income

Question 6

It means that society is getting the maximum benefits from its scarce resources.

Answer 6

Efficiency

Question 7

It means that benefits are distributed uniformly among society’s members.

Answer 7

Equality

Question 8

What is Principle 2?

Answer 8

The cost of Something is What you Give Up to Get It

Question 9

Because people face trade-offs, making decisions requires comparing Blank and Blank of alternative courses of actions

Answer 9

Costs and Benefits

Question 10

An item that you give up to get another item.

Answer 10

Opportunity Cost

Question 11

What is Principle 3?

Answer 11

Rational People Think at the Margin

Question 12

People who systematically and purposefully do the best that they can to achieve their objectives

Answer 12

Rational People

Question 13

Economists use this term to describe a small incremental adjustment to an existing plan of action

Answer 13

Marginal Change

Question 14

What is Principle 4?

Answer 14

People respond to incentives

Question 15

Something that induces a person to act

Answer 15

Incentive

Question 16

A tax on gasoline is an example of?

Answer 16

Incentive

Question 17

Principles under How People Make Decisions

Answer 17

• People Face Trade-Offs
• The cost of Something is What you Give Up to Get It
• Rational People Think at the Margin
• People respond to incentives

Question 18

Principles under How People Interact

Answer 18

• Trade can Make everyone Better Off
• Markets are usually a good way to organize economic activity
• Governments can sometimes improve market outcomes

Question 19

Allows each person to specialize in the activities he or she does best.

Answer 19

Trade

Question 20

What is Principle 5?

Answer 20

Trade can Make everyone Better Off

Question 21

What is Principle 6?

Answer 21

Markets are usually a good way to organize economic activity

Question 22

An economy that allocates resources through decentralized decisions of many firms and households as they interact in market for goods and services

Answer 22

Market Economy

Question 23

According to Adam Smith, Households and Firms are guided by an?

Answer 23

Invisible Hand

Question 24

Prevents prices from adjusting naturally to supply and demand

Answer 24

Government

Question 25

Impedes the invisible hand’s ability to coordinate the decisions of the households and firms that make up an economy.

Answer 25

Government

Question 26

The ability of an individual to own and exercise control over scarce resources

Answer 26

Property Rights

Question 27

What is Principle 7?

Answer 27

Governments can sometimes improve market outcomes

Question 28

Broad reasons for the government to interfere in the economy

Answer 28

to promote efficiency or to promote equality

Question 29

A situation in which a market left on its own fails to allocate resources efficiently

Answer 29

Market failure

Question 30

One possible cause of market failure

Answer 30

Externality

Question 31

The impact of one person’s actions on the well-being of a bystander

Answer 31

Externality

Question 32

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Answer 32

Market Power

Question 33

Principles under How the Economy as a Whole Works

Answer 33

• A country’s standard of living depends on its ability to produce goods and services
• Prices rise when the Government prints too much money
• Society a Short-run trade-off between Inflation and Unemployment

Question 34

What principle states that almost all variation in living standards is attributable to differences in countries’ productivity?

Answer 34

A country’s standard of living depends on its ability to produce goods and services

Question 35

The quantity of goods and services produced from each unit of labor

Answer 35

Productivity

Question 36

To boost living standards, policymakers need to?

Answer 36

raise productivity by ensuring that workers are well educated, have the tools they need, and have access to the best technology.

Question 37

An increase in the overall level of prices in the economy

Answer 37

Inflation

Question 38

What causes inflation?

Answer 38

Growth in the quantity of money

Question 39

What does increasing the amount of money stimulate?

Answer 39

Overall level of spending and the demand for goods and services

Question 40

Higher demand causes firms to?

Answer 40

Raise their prices, hire more workers, and produce alarge quantity of goods and services

Question 41

More hiring entails

Answer 41

Lower unemployment

Question 42

The irregular and ;largely unpredictable fluctuations in economic activity, such as employment and production

Answer 42

Business Cycle