Principles of Economics Chapter 1

Question 1

economics

Answer 1

The study of how individuals and societies choose to use the
scarce resources that nature and previous generations have provided.
The key word in this definition is choose.
Economics is a behavioral, or social, science. In large measure, it is the study of how people make choices. The choices that people make, when added up, translate into societal choices.

Question 2

Why Study Economics?

Answer 2

To Learn a Way of Thinking

Three fundamental concepts:
 Opportunity cost
 Marginalism
 Efficient markets

Question 3

opportunity cost

Answer 3

The best alternative that we forgo, or give up, when we
make a choice or a decision.

Question 4

scarce

Answer 4

Limited.

Question 5

marginalism

Answer 5

The process of analyzing the additional or incremental costs or
benefits arising from a choice or decision.

Question 6

efficient market

Answer 6

No Free Lunch
A market in which profit opportunities are eliminated almost instantaneously.

Question 7

Industrial Revolution

Answer 7

The period in England during the late eighteenth and early nineteenth centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities.

Question 8

The study of economics

Answer 8

teaches us a way of thinking and helps us make decisions.
is an essential part of the study of society.

Question 9

To be an informed citizen

Answer 9

requires a basic understanding of economics.

Question 10

microeconomics

Answer 10

The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, firms and households.

Question 11

macroeconomics

Answer 11

The branch of economics that examines the economic behavior of aggregates—income, employment, output, and so on—on a national scale.

Question 12

Difference between macro and micro

Answer 12

Microeconomics looks at the individual unit—the household, the firm, the industry. It sees and examines the “trees.”
Macroeconomics looks at the whole, the aggregate. It sees and analyzes the “forest.”

Question 13

Behavioral economics

Answer 13

uses psychological theories relating to emotions and social context to help understand economic decision making and policy. Much of the work in behavioral economics focuses on the biases that individuals have that affect the decisions they make.

Question 14

Comparative economic
systems

Answer 14

examines the ways alternative economic systems function. What are the advantages and disadvantages of different systems?

Question 14

Econometrics

Answer 14

applies statistical techniques and data to economic problems in an effort to test hypotheses and theories. Most schools require economics majors to take at least one course in statistics or econometrics.

Question 15

Economic development

Answer 15

focuses on the problems of low-income countries. What can be done to promote development in these nations? Important concerns of development for economists include population growth and control, provision for basic needs, and strategies for international trade.

Question 16

Economic history

Answer 16

traces the development of the modern economy. What economic and political events and scientific advances caused the Industrial Revolution? What explains the tremendous growth and progress of post-World War II Japan? What caused the Great Depression of the 1930s?

Question 17

Environmental
economics

Answer 17

studies the potential failure of the market system to account fully for the impacts of production and consumption on the environment and on natural resource depletion. Have alternative public policies and new economic institutions been effective in correcting these potential failures?

Question 18

Finance

Answer 18

examines the ways in which households and firms actually pay for, or finance, their purchases. It involves the study of capital markets (including the stock and bond markets), futures and options, capital budgeting, and asset valuation.

Question 19

Health economics

Answer 19

analyzes the health care system and its players: government, insurers, health care providers, and patients. It provides insight into the demand for medical care, health insurance markets, cost-controlling insurance plans (HMOs, PPOs, IPAs), government health care programs (Medicare and Medicaid), variations in medical practice, medical malpractice, competition versus regulation, and national health care reform.

Question 20

The history of economic
thought

Answer 20

which is grounded in philosophy, studies the development of economic ideas and theories over time, from Adam Smith in the eighteenth century to the works of economists such as Thomas Malthus, Karl Marx, and John Maynard Keynes. Because economic theory is constantly developing and changing, studying the history of ideas helps give meaning to modern theory and puts it in perspective.

Question 21

Industrial organization

Answer 21

looks carefully at the structure and performance of industries and firms within an economy. How do businesses compete? Who gains and who loses?

Question 22

International economics

Answer 22

studies trade flows among countries and international financial institutions. What are the advantages and disadvantages for a country that allows its citizens to buy and sell freely in world markets? Why is the dollar strong or weak?

Question 23

Labor economics

Answer 23

deals with the factors that determine wage rates, employment, and unemployment. How do people decide whether to work, how much to work, and at what kind of job? How have the roles of unions and management changed in recent years?

Question 24

Law and economics

Answer 24

analyzes the economic function of legal rules and institutions. How does the law change the behavior of individuals and businesses? Do different liability rules make accidents and injuries more or less likely? What are the economic costs of crime?

Question 25

Public economics

Answer 25

examines the role of government in the economy. What are the economic functions of government, and what should they be? How should the government finance the services that it provides? What kinds of government programs should confront the problems of poverty, unemployment, and pollution? What problems does government involvement create?

Question 26

Urban and regional
economics

Answer 26

studies the spatial arrangement of economic activity. Why do we have cities? Why are manufacturing firms locating farther and farther from the center of urban areas?

Question 27

positive economics

Answer 27

An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.

Question 28

normative economics

Answer 28

An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.

Question 29

model

Answer 29

A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables.

Question 30

variable

Answer 30

A measure that can change from time to time or from observation to observation.

Question 31

Ockham’s razor

Answer 31

The principle that irrelevant detail should be cut away.

Question 33

ceteris paribus, or all else equal

Answer 33

A device used to analyze the relationship between two variables while the values of other variables are held unchanged.
Using the device of ceteris paribus is one part of the process of abstraction. In formulating economic theory, the concept helps us simplify reality to focus on the relationships that interest us.

Question 34

post hoc, ergo propter hoc

Answer 34

Literally, “after this (in time), therefore because of this.”
A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.

Question 35

fallacy of composition

Answer 35

The erroneous belief that what is true for a part is necessarily true for the whole.

Question 36

empirical economics

Answer 36

The collection and use of data to test economic theories.

Question 37

Four criteria in judging economic outcomes:

Answer 37

1. Efficiency
2. Equity
3. Growth
4. Stability

Question 38

efficiency

Answer 38

In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost.

Question 39

equity

Answer 39

Fairness.

Question 39

economic growth

Answer 39

An increase in the total output of an economy.

Question 40

stability

Answer 40

A condition in which national output is growing steadily, with low inflation and full employment of resources.

Question 41

graph

Answer 41

A graph is a two-dimensional representation of a set of numbers, or data.

Question 42

time series graph

Answer 42

A time series graph shows how a single measure or variable changes over time.

Question 43

positive relationship

Answer 43

A relationship between two variables, X and Y, in which a decrease in X is associated with a decrease in Y, and an increase in X is associated with an increase in Y.

Question 44

negative relationship

Answer 44

A relationship between two variables, X and Y, in which a decrease in X is associated with an increase in Y and an increase in X is associated with a decrease in Y.

Question 45

slope

Answer 45

A measurement that indicates whether the relationship between variables is positive or negative and how much of a response there is in Y (the variable on the vertical axis) when X (the variable on the horizontal axis) changes.

Question 46

A positive slope

Answer 46

indicates that increases in X are associated with increases in Y and that decreases in X are associated with decreases in Y.

Question 47

A negative slope

Answer 47

indicates the opposite—
when X increases, Y decreases; and when X decreases, Y increases.