Unit 1: Basic Economic Concepts

Question 1

The limited nature of society’s resources

Answer 1

Scarcity

Question 2

The study of how society manages its scarce resources

Answer 2

Economics

Question 3

The property of society getting the most it can from its scarce resources

Answer 3

Efficiency

Question 4

The property of distributing economic prosperity fairly among the members of society

Answer 4

Equity

Question 5

Whatever must be given up to obtain some item

Answer 5

Opportunity Cost

Question 6

Some incremental adjustments to a plan of action

Answer 6

Marginal Changes

Question 7

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

Answer 7

Market Economy

Question 8

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

Answer 8

Market Failure

Question 9

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

Answer 9

Externality

Question 10

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

Answer 10

Market Power

Question 11

The quantity of goods and services produced from each hour of a worker’s time

Answer 11

Productivity

Question 12

An increase in the overall level of prices in the economy

Answer 12

Inflation

Question 13

A curve that shows the short-run trade off between inflation and unemployment

Answer 13

Phillips Curve

Question 14

Fluctuations in economic activity, such as employment and production

Answer 14

Business Cycle

Question 15

List and briefly explain the four principles of individual decision making

Answer 15

The fundamental lessons about individual decision-making are that people face tradeoffs among alternative goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benefits, and that people change their behavior in response to the incentives they face.

Question 16

List and briefly explain the three principles concerning economic interactions

Answer 16

The fundamental lessons about interactions among people are that trade can be mutually beneficial, that markets are usually a good way of coordinating trade among people, and that the government can potentially improve market outcomes if there is some market failure or if the market outcome is inequitable.

Question 17

List and briefly explain the three principles that describe how the economy as a whole works

Answer 17

The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards, that money growth is the ultimate source of inflation, and the society faces a short-run tradeoff between inflation and unemployment.

Question 18

A visual model of the economy that shows how dollars flow through markets among households and firms

Answer 18

Circular-Flow Diagram

Question 19

A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

Answer 19

Production Possibilities Frontier

Question 20

The study of how households and firms make decisions and how they interact in markets

Answer 20

Microeconomics

Question 21

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Answer 21

Macroeconomics

Question 22

Claims that attempt to describe the world as it is

Answer 22

Positive Statements

Question 23

Claims that attempt to prescribe how the world should be

Answer 23

Normative Statements

Question 24

In what sense is economics like a science?

Answer 24

Economists try to address their subject with a scientists’ objectivity. Like all scientists, they make appropriate assumptions and build simplified models in order to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier.

Question 25

What is the difference between positive statements and normative statements?

Answer 25

A positive statement is an assertion about how the world IS. A normative statement is an assertion about how the world OUGHT TO BE. When economists make normative statements, they are acting more as policy advisers than scientists.

Question 26

Why might economic advisers to the president disagree about a question of policy?

Answer 26

Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values.

Question 27

The comparison among producers of a good according to their productivity

Answer 27

Absolute Advantage

Question 28

Whatever must be given up to obtain some item

Answer 28

Opportunity Cost

Question 29

The comparison among producers of a good according to their opportunity cost

Answer 29

Comparative Advantage

Question 30

Goods produced abroad and sold domestically

Answer 30

Imports

Question 31

Goods produced domestically and sold abroad

Answer 31

Exports

Question 32

Why is interdependence and trade desirable?

Answer 32

Each person consumes goods and services produced by many other people both in our country and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.

Question 33

What two ways are their to compare the ability of two people in producing two goods?

Answer 33

The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing that good. The person who has the smaller opportunity cost of producing the good is said to have the comparative advantage.

Question 34

What are the gains of trade based on?

Answer 34

The gains for grade are based on comparative advantage, not absolute advantage.

Question 35

Why does trade make everyone better off?

Answer 35

Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage.

Question 36

A group of buyers and sellers of a particular good or service

Answer 36

Market

Question 37

A market in which there are many buyers and many sellers so that each has a negligible impact on the market price

Answer 37

Competitive Market

Question 38

The amount of a good that buyers are willing and able to purchase

Answer 38

Quantity Demanded

Question 39

The claim that, other things equal, the quantity demanded of a good galls when the price of the goods rises

Answer 39

Law of Demand

Question 40

A table that shows the relationship between the price of a good and the quantity demanded

Answer 40

Demand Schedule

Question 41

A graph of the relationship between the price of a good and the quantity demanded

Answer 41

Demand Curve

Question 42

A good for which, other things equal, an increase in income leads to an increase in demand

Answer 42

Normal Good

Question 43

A good for which, other things equal, an increase in income leads to a decrease in demand

Answer 43

Inferior Good

Question 44

Two goods for which an increase in the price of one leads to an increase in the demand for the other

Answer 44

Substitutes

Question 45

Two goods for which an increase in the price of one leads to a decrease in the demand for the other

Answer 45

Complements

Question 46

What are the determinants of demand?

Answer 46

Income - normal good
Income - inferior good
Price - substitute
Price - complement
Change in taste
Expectations - price of good
Expectations - income level
Market Size