Chapter 1-Economics

Rational Choice

A rational choice is a choice that uses the available resources to achieve the greatest benefit or level of satisfaction. We attempt to make rational choices by comparing costs and benefits.

We Respond to Incentives

An incentive is a reward or a penalty that encourages or discourages an action. •Positive or Negative

Which of the following are not essential components of an economic model?

Assumptions Variables CORRECT ANSWER: Normative statements Hypotheses

Which of the following is not a possible opportunity cost of attending college?

Backpacking across Europe instead of attending college Starting a business instead of attending college Wages you could have made instead of attending class and studying CORRECT ANSWER: The cost of housing

A Choice Is a Tradeoff

Because we face scarcity we must make choices. You can think about your choices as a tradeoff. •giving up one thing to obtain something else.

Benefit: What You Gain

Benefit is the gain or pleasure that something brings.

According to the rationality assumption, people:

Do not intentionally make decisions that would leave them worse off.

Economics

Economics is the social science that studies decision making. The study of how people allocate their limited resources to satisfy their unlimited wants.

Economics as a Policy Tool

Economics provides a way of approaching problems in all aspects of our lives: personal, business, and government.

The decision to raise taxes is an example of which type of economic policy?

Government

Economic decisions are made at every level in society. When we try to decide which production method to use among several alternatives, which of the following key economic questions are we trying to answer?

How do we produce the products?

Which of the following is a positive economic statement?

If minimum wage rates rise, then unemployment will rise

Cost: What You Must Give Up

Opportunity cost is the best thing that you must give up to get something—the highest-valued forgone alternative. The next best alternative use of some resource.

Scarcity

Scarcity is the condition that arises because wants exceed the ability of resources to satisfy them. Faced with scarcity, we must make choices.

Macroeconomics:

The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make. •The national unemployment rate •The rate of growth in the money supply •The national government's budget deficit

Microeconomics:

The study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments. •A family's choice of having a baby •An individual firms production decisions •Choosing to work overtime or not

Economics as a Social Science

Use real world data as a guideline to predict future economic phenomena Economic Models An economic model is a simplified version of the real world, that under specific assumptions will hold true.

If the president of Columbia commented that "we should do something to reduce inflation in Columbia," this would be an example of:

a normative statement

The pace of globalization has accelerated in recent years largely because of

advances in communication technology

A reward or penalty that encourages or discourages a specific behavior or action is known as

an incentive

Goods and services

are the things people derive happiness or satisfaction from. • Goods -(typically) tangible objects • Services - intangible, provided by someone else

Economic models often simplify the real world by holding all things equal and changing one variable to determine the impact of the change. The "all things equal" assumption is also known as:

ceteris paribus

When two values tend to move together in a predictable manner it is known as

correlation

Understanding economics can help policymakers devise strategies to do all of the following except:

eliminate climate change

One of the first steps in deciding whether to complete your education is to:

evaluate the marginal cost and marginal benefit of that decision.

The social security time bomb refers to the

future inability of the U.S. government to fully fund SSI

Tangible products like cars and televisions are referred to as

goods

Macroeconomics can be used to understand all of the topics listed below, except

how a consumer decides between the purchase of two different cars

When a person makes choices that are best for them they are said to be acting

in their own self-interest

Economics:

is concerned with how people respond to incentives

Economics is the study of choice under conditions of:

scarcity

The principle of opportunity cost evolves from the concept of:

scarcity

Economic models are:

simplifications of reality that focus only on key relationships and ignore less relevant details

The marginal benefit you receive from eating a third slice of pizza will be __________ the marginal benefit you receive from eating the first slice of pizza.

smaller than

Choices that are best for society as a whole are considered to be in the:

social interest

Macroeconomics is concerned with all of the following except:

standard of living inflation rates CORRECT ANSWER: political party affiliation unemployment rates

When you make choices you are picking from a slate of available options so the choice you make is essentially a

tradeoff

Ceteris Paribus Assumption

•"All else equal" or "Other things unchanged" •The only factors changing are the factors we allow to change.

Economic Goods & Services

•Goods and Services that are scarce.

Rationality Assumption

•Individuals are self-interested, and respond predictably to opportunities for gain. •Won't intentionally make a choice that makes themselves worse off.