Chapter 1: Limits, Alternatives, and Choices
At the core of economics is the idea that:
"There is no free lunch." Someone bears a cost.
Economics assumes that human behavior reflects:
"rational self-interest"
Economic growth:
a larger total output.
Refer to the above graph. The shift of the budget line from AB to CD is consistent with:
an increase in money income.
The law of increasing opportunity costs:
as the production of a particular good increases, the opportunity cost of producing an additional unit rises.
A point on the frontier of the production possibilities curve is:
attainable and the economy is efficient.
Among competing issues, the most important concern of economics is with the:
efficient use of limited productive resources to satisfy economic wants.
Macroeconomics:
examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors.
Positive economics:
focuses on facts and cause-and-effect relationships. It includes description, theory development, and theory testing. (What is)
Normative economics:
incorporates value judgements about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal. (What ought to be)
Attainable budget line combinations:
on or inside the budget line.
When an economist says that there is "too much of a good thing," the economist is suggesting that:
the marginal benefit of the thing is less than the marginal cost.
Economizing problem:
the need to make choices because economic wants exceed economic means. Limited income, unlimited wants.
Microeconomics:
the part of economics concerned with decision making by individual customers, workers, households, and business firms.
Marginal benefit is:
the perceiveed lifetime pleasure gained from something.
Refer to the above graph. Assume that before the Persian Gulf War, Iraq's production possibilities were represented by AB. Which line on the above graph would represent the change in Iraq's production possibilities after the war?
AB to EF
The production possibilities table below shows the hypothetical relationship between the production of capital goods and consumer goods in an economy. Refer to the table above. What is the opportunity cost of producing the first two units of capital goods?
9 units of consumer goods (22-13) (from point a to point c)
Economic Principle:
A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.
Unattainable budge line combinations:
All the combinations beyond the budget line.
Scarce Resources:
Land, Labor, Capital, and Entrepreneurial Ability.
Land, Labor, Capital, and Entrepreneurial Ability are called:
The factors of production, or simply, inputs.
Utility means:
The pleasure, happiness, or satisfaction obtained from consuming a good or service.
Opportunity costs:
To obtain more of one thing, society forgoes the opportunity of getting the next best thing. The opportunit cost of the choice.
An aggregate is:
a collection of specific economic units treated as if they were one unit. (Like lumping together all of the U.S. consumers.)
Budget line:
a schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income.
Decreases in product prices causes the consumer's:
budget line to shift outward from the origin.
Which would be considered a macroeconomic study? A study of the effect of:
changing government spending to increase employment.
The study of how a single business firm sets its prices would fall under the study of:
microeconomics
The economic perspective includes:
scarcity and choice, purposeful behavior, and marginal analysis.
The role of an assumption in an economic theory is to:
simplify the theory.
Other-things-equal-assumption (ceteris paribus):
the assumption that factors other than those being considered do not change. They assume that all variables except those under immediate consideration are held constant for a particular analysis.