Chapter 1: Review questions

3.1 Why do economists use models? How are economic data used to test models?

-Because they're simplified versions of reality, thus giving them the opportunity to a way to analyze economic situations in a simple form. -Through hypothesis confirmed by this data.

2.1 Why does scarcity imply that every society and every individual face trade-offs?

-Because with there being limited resources to produce goods or services, there must be a choice made between one or the other.

3.2 Describe the five steps economists follow to arrive at a useful economic model.

-Decide on the assumptions to use. -Formulate a testable hypothesis. -Use economic data to test the hypothesis. -Revise the model if it fails to explain the economic data well. -Retain the revised model to help answer similar economic questions in the future.

4.1 Briefly discuss the difference between microeconomics and macroeconomics.

-Microeconomics is individual centered. Macroeconomics is globally/society centered.

4.2 Is every economic issue either strictly microeconomic or strictly macroeconomic? Briefly explain.

-No; because there are situations where both are needed to come up with a solution to the issue.

1.1 Briefly discuss the meaning of each of the following economic ideas: People are rational, people respond to economic incentives, and optimal decisions are made at the margin.

-People are rational, meaning, people will weigh out the costs and benefits of anything. -People respond to economic incentives, meaning, they will look at the cost compared to benefits when purchasing goods or services, and they will go with the option that offers them more. -Optimal decisions are made at the margin, meaning, people go through various stages of decision making prior to making the bigger decision, not everything is "all or nothing".

1.2 What is scarcity? Why is scarcity central to the study of economics?

-Scarcity is a situation where unlimited wants exceed the limited resources available. -Because it helps firms understand the wants of consumers thus helps manage the resources properly to provide them with those wants.

2.2 What are the three economic questions that every society must answer? Briefly discuss the differences in the way centrally planned, market, and mixed economies answer these questions.

-What goods and services will be produced? -How will the goods and services be produced? -Who will receive the goods and services produced? -In a centrally planned economy, the government decides what goods and services are produced, how the goods and services are produced, and who receives the goods and services. -In a market economy, the consumers decide what, the firms decide how, and whoever can pay the most receives them. -In a mixed economy, the government plays a significant role within answering these three questions; however, the firms and consumers still decide.