Principles of Economics

Question 1

Principle 1 (Individual Choices)

Answer 1

Choices are necessary because resources are scarce

Question 2

Principle 2 (Individual Choices)

Answer 2

The true cost of something is its opportunity cost

Question 3

Principle 3 (Individual Choices)

Answer 3

“How much” is a decision at the margin

Question 4

Principle 4 (Individual Choices)

Answer 4

People usually respond to incentives, exploting opportunities to make themselves better off

Question 5

Principle 5 (Interaction and Individual Choices)

Answer 5

There are gains from trade

Question 6

Principle 6 (Interaction and Individual Choices)

Answer 6

Markets move towards equilibrium

Question 7

Principle 7 (Interaction and Individual Choices)

Answer 7

Resources should be used efficiently to achieve society’s goals

Question 8

Principle 8 (Interaction and Individual Choices)

Answer 8

Markets usually lead to efficiency

Question 9

Principle 9 (Interaction and Individual Choices)

Answer 9

When markets don’t achieve efficiency, government interventions can improve society’s welfare

Question 10

Principle 10 (Economy-Wide Interactions)

Answer 10

One person’s spending is another person’s income

Question 11

Principle 11 (Economy-Wide Interactions)

Answer 11

Overall spending sometimes get out of line with the economy’s productive capacity

Question 12

Principle 12 (Economy-Wide Interactions)

Answer 12

Government policies can change spending

Question 13

Resource

Answer 13

Anything that can be used to produce something else

Question 14

Scare

Answer 14

In short supply; a resource is scare when there is not enough of the resource available to satisfy all the various ways a society wants to use it

Question 15

Opportunity Cost

Answer 15

What you must give up in order to get something

Question 16

Marginal Decision

Answer 16

A decision made at the margin of an activity about whether to do a bit more or less of that activity

Question 17

Marginal Analysis

Answer 17

The study of marginal decisions

Question 18

Incentive

Answer 18

Anything that offers rewards to people to change their behaviour

Question 19

Specialisation (Adam Smith, 1776, Wealth of Nations)

Answer 19

The situation in which each person specialises in the task they are good at performing

Question 20

Equilibrium

Answer 20

An economic system in which no individual would be better off doing something different

Question 21

Efficiency

Answer 21

Taking all opportunities to make some people better off without making other people worse off

Question 22

Equity

Answer 22

A condition in which everyone gets their “fair share”

Question 23

Overall Spending

Answer 23

The amount of goods and services consumers and businesses want to buy

Question 24

Productive Capacity

Answer 24

The amount of goods and services the economy can produce

Question 25

Macroeconomic Policy

Answer 25

Monetary and Fiscal policy