Ch. 1

Economists build models to identify relationships between variables and thus help them predict the effects of changes in some variables on others. In the following table, identify the economic model-building process by selecting the appropriate labels from the dropdown menus.

Step 1: Problem Identification (At this stage, the issue to be studied is defined.) Step 2: Model Development (Here, the key variables in the model used to investigate the phenomenon under study are selected.) Step 3: Testing a Theory (In this stage, the researcher collects data that are used to test the model developed in the second step. Upon testing, the researcher either accepts or rejects his or her model.) In order to be useful, models require simplifying assumptions.

economics

The study of how people seek to satisfy their needs and wants by making choices the study of how society manages its scarce resources

Human wants:

can never be fully satisfied.

Scarcity:

means we are unable to have as much as we would like to have

Scarcity:

means we are unable to have as much as we would like to have.

The perpetual problem in economics is:

our inability to satisfy everyone's wants with the available resources

The finite nature of the economy's resource base:

will always be with us

entrepreneurship

the process of bringing together the three factors of production - natural resources, labor and capital - the person who does this is an entrepreneur.

microeconomics

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses

macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

land

natural resources that are used to make goods and services

Wealthy families wanting finer homes and nicer vacations exemplify

scarcity

Economic model

simplified version of a complex concept or behavior expressed in the form of a graph, figure, equation, or diagram

positive economics

the analysis of facts or data to establish scientific generalizations about economic behavior focuses on facts and cause-and-effect relationships

When economists say goods are scarce, they mean:

the desire for goods and services exceeds our ability to produce them with the limited resources available.

When economists say scarcity, they mean:

the human desire for goods exceeds the available supply of time, goods and resources.

capital

An economic system based on private ownership of capital

Which of the following is an example of scarcity?

Camden would like to have more designer clothes than he can afford.

Which of the following accurately explain the importance of the ceteris paribus assumption for an economic model? Check all that apply.

It allows economists to isolate or focus attention on selected variables. (Ceteris paribus is a Latin phrase that means while certain variables change, "all other things remain unchanged." It allows economists to isolate or focus attention on selected variables. See section: "The Ceteris Paribus Assumption.")

normative economics

The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics. the study of what the goals of the economy should be

To what extent do you think normative economic analysis, as opposed to positive economic analysis determines our nation's public policy decisions made by government? Why? Is that "good" or "bad?" Why?

This is debatable.

Resources

all things used in producing goods and services

Which of the following best explains why both nations with high living standards and nations with low living standards face the problem of scarcity?

All individuals, whether rich or poor, are dissatisfied with their material well-being and would like more. Explanation: (Scarcity is a fact of life throughout the world because human wants are forever greater than the available supply of time, goods, and resources. Because of scarcity, people cannot have as much as they would like. It is impossible to satisfy every desire. Even the richest people and richest nations cannot have it all. No matter how affluent an individual is, the wish list continues to grow. See section: "The Problem of Scarcity.")

Causation

Causation means that the exposure produces the effect. It can be the presence of an adverse exposure, e.g., increased risks from working in a coal mine, using illicit drugs, or breathing in secondhand smoke. Causative factors can also be the absence of a preventive exposure, such as not wearing a seatbelt or not exercising. A cause must be associated with the outcome, but simply demonstrating an association is not enough. To conclude that lack of exercise is a cause of heart disease, one needs to review the body of evidence suggesting a causal relationship and also consider other criteria. Example: -Does exposure to tobacco smoke and air pollution precede the occurrence of lung cancer? -Is there a strong association between smoking and the subsequent occurrence of lung cancer? -Is it possible that having lung cancer causes one to smoke?

Suppose that the hypothetical country of Andesland suffers a chronic scarcity of its staple grain, quinoa. True or False: Andesland must be a developing country, since scarcity is not a problem in developed countries.

False (Scarcity is the condition in which human wants forever exceed the supply of time, goods, and available resources to satisfy those wants. Because resources are scarce, and wants are unlimited, choices must be made. Economics is the study of how society makes decisions on allocating its limited resources for the production of goods and services to best satisfy unlimited wants. Although scarcity may have more severe and life-threatening effects in developing countries, developed countries face scarcity, as well. This is because individuals and countries always desire more goods and services, regardless of their level of material well-being.)

Suppose that for several years Congress cuts spending for the military, and then unemployment rises in the U.S. defense industry. There is only an association between these events but no causation.

False (The fact that one event follows another does not necessarily mean that the first event caused the second event. Sometimes it is just an association. You must be very careful to state that there is causation only when the cause-and-effect relationship is stable or dependable over time. In this case, there is causation, because spending on defense directly affects how many people are hired in the defense industry. See section: "Association versus Causation.")

An economist wants to know how demand for bracelets changes when the price of bracelets increases. At the same time, a recession starts to change people's income.

The ceteris paribus assumption does not apply to this situation. (In this case, the ceteris paribus assumption does not apply because the change in income does not allow the economist to study the direct relationship between two key variables: the quantity demanded and the price of bracelets. See section: "The Ceteris Paribus Assumption.")

Indicate whether each example is classified as microeconomics or macroeconomics.

- Price of a gallon of gasoline = Microeconomics - The money supply = Macroeconomics - Inflation = Macroeconomics - A consumer's response to changes in the price of ice cream = Microeconomics (Macroeconomics is the branch of economics that studies decision making for the economy as a whole. It examines economy-wide variables and "big picture" policies. Inflation and the money supply are macroeconomics concepts. Microeconomics is the branch of economics that studies decision making by a single individual, household, firm, industry, or level of government. A consumer's response to changes in the price of ice cream and the price of a gallon of gasoline are microeconomics examples. See sections: "Macroeconomics" and "Microeconomics.")

in the following table, categorize each statement as positive or normative.

- The financial crisis was caused by faulty mathematical models that encouraged excessive risk taking. = Positive - The lack of effective regulation contributed to a risk-seeking culture in the financial services industry. = Positive - Central banks should have imposed tighter regulations on banks to prevent the financial crisis. = Normative - Executives of banks that received financial assistance from the government should not have received bonuses. = Normative

indicate whether each argument adapted from this case is an example of positive economics or normative economics.

- The government should require airbags in all cars. = Normative Economics - Airbags have killed both adults and children whose heads were within the inflation zone at the time of deployment. = Positive Economics (Positive statements rely on facts, or "what is." Note that positive statements may or may not be correct. "Airbags have killed both adults and children whose heads were within the inflation zone at the time of deployment" is a positive statement. Normative statements are opinions, or "what should be." "The government should require airbags in all cars" is an example of a normative statement. See section: "Why Do Economists Disagree?")

In the following table, categorize each of the following examples as a topics in microeconomics or macroeconomics.

- The government's decision on how much to spend on public projects = Macroeconomics - The effect of government regulation on a monopolist's production decisions = Microeconomics - A consumer's optimal choice when buying a flat-screen TV = Microeconomics

Indicate whether each question in the following table is classified as a microeconomics issue or as a macroeconomics issue.

- What will cause the nation's inflation rate to fall? = Macroeconomics - How will an increase in the price of lemonade affect the quantity of soda sold? = Microeconomics - Does a large federal budget deficit reduce the rate of unemployment in the economy? = Macroeconomics - How does a quota on textile imports affect the textile industry? = Microeconomics (Macroeconomics examines economy-wide variables and "big picture" policies. Inflation and unemployment are macroeconomics concepts. Microeconomics examines decision making by a single individual, household, firm, industry, or level of government. The price of any single product and the workings of a single industry are microeconomics concepts. See section: "Macroeconomics" and "Microeconomics.")

Which of the following correctly explain why money is not considered capital in economics? Check all that apply.

1. Money can only be used to produce privately owned capital, not publicly owned capital. 2. Money is used to purchase land, labor, or capital. (In the study of economics, capital does not refer to money assets. Capital in economics means a factor of production, such as a factory or machinery. Capital includes the physical plants, machinery, and equipment used to produce other goods. Capital can be privately owned by private companies (factories, office buildings, warehouses, and so on) or publicly owned infrastructure provided by government through taxes (roads, bridges, dams, airports, harbors, and public universities and other government buildings). Money is not a resource and is, therefore, not capital. Instead, money is used to purchase land, labor, or capital as well as many consumer goods and services. See section: "Capital.")

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

Respond to the following statement: "Theories are of no use to me because they are not very practical. All I need are the facts because they speak for themselves."

Facts don't speak for themselves. Facts are meaningless unless there is a theory to tie them together.

What are our nation's major macroeconomic goals? Are they in conflict with each other?

Full employment, low inflation, and high rates of economic growth are our nation's major macro goals. Also note that they are often in conflict with each other. For example, full employment and more rapid growth create higher rates of inflation.

Labor

Human effort directed toward producing goods and services

Why isn't money a resource?

It isn't used in the production process; it merely facilitates trade.

Does economics help to teach us how to approach problems, or does it provide us with a set of answers to problems?

It teaches us "how to think." It doesn't provide us with answers.

The resources used to produce goods and services are divided into three categories: land, labor (including the special category of entrepreneurship), and capital. A barley farmer in Kansas irrigates with water from a nearby lake to produce barley. Water is a natural resource rather than a human-made good used in production. Thus water used for irrigation best fits into the resource category of:

Land (Water is a natural resource rather than a human-made good used in production. Thus water used for irrigation best fits into the resource category of land.)

Complete the following sentences to explain why it is important for an economic model to be an abstraction from the real world.

The purpose of a model is to construct an abstraction from real-world complexities to make events understandable . To be useful, a model requires simplified assumptions. (A model, which is an abstraction from the real world, uses simplified assumptions, allowing you to see past many of the complexities of a question in order to examine the core of the issue. The purpose of an economic model is to forecast or predict the results of various changes in variables. An economic theory can be expressed in the form "If X, then Y, all other things held constant." An economic model is useful only if it yields accurate predictions. When the evidence is consistent with the theory that X causes outcome Y, there is confidence in the theory's validity. When the evidence is inconsistent with the theory that X causes outcome Y, the researcher rejects this theory. See section: "The Methodology of Economics.")

ceteris paribus

a Latin phrase that means "all other things held constant"

Association

a statistical relationship between two variables. Two variables may be associated without a causal relationship. Example: There is a statistical association between the number of people who drowned by falling into a pool and the number of films Nicolas Cage appeared in a given year. However, there is obviously no causal relationship.

Which of the following is a normative economic statement? a. The unemployment rate for the United States is currently 5.4%. b. The inflation rate in the United States is too high. c. An increase in the price of a good will reduce the amount purchased. d. Higher profits in an industry will attract more entrepreneurs into the industry.

b. The inflation rate in the United States is too high.

Scarcity is a problem:

because human wants are unlimited while resources are limited.

Which of the following is not a resource? a. land b. labor c. money d. capital

c. money

A model (or theory): a. is a general statement about the causal relationship between variables based on facts. b. helps explain and predict the relationship between variables. c. when expressed as a downward (negatively) sloping graph implies an inverse relationship between the variables. d. all of the above.

d. all of the above.

Scarcity:

exists everywhere because human wants can never be satisfied.

Microeconomics is concerned with:

some specific segment of the economic system