Economics Chapter One

Three Key Economic Ideas

1. People are Rational 2. People Respond to Economic Incentives 3. Optimal Decisions Are Made at the Margin

Trade-offs force society to make choices when answering the following three fundamental questions:

1. What goods and services will be produced? 2. How will they be produced? 3. Who will received the produced good/services?

Microeconomics is the study of A. how households and firms make choices. B. the economy as a whole. C. the global economy. D. topics such as unemployment, inflation, and economic growth.

A

Which of the following statements is true about scarcity? A. Scarcity refers to the situation in which unlimited wants exceed limited resources. B. Scarcity is not a problem for the wealthy. C. Scarcity is only a problem when a country has too large a population. D. Scarcity arises when there is a wide disparity in income distribution.

A

In economics, the term ________ means "additional" or "extra". A. allocative B. marginal C. equity D. optimal

B

In economics, choices must be made because we live in a world of A. unemployment. B. scarcity. C. greed. D. unlimited resources.

B. scarcity

The distribution of income primarily determines which of the fundamental economic questions? A. What goods and services are to be produced? B. How the goods and services are to be produced? C. Who will receive the goods and services produced? D. How to plan the economy?

C

The highest valued alternative that must be given up to engage in an activity is the definition of A. economic equity. B. marginal benefit. C. opportunity cost. D. marginal cost.

C

Which of the following is a microeconomics question? A. How much will be saved and how much will be produced in the entire economy? B. What will the level of economic growth be in the entire economy? C. What factors determine the price of carrots? D. What determines the average price level and inflation?

C

Economists assume that individuals A. behave in unpredictable ways. B. will never take actions to help others. C. prefer to live in a society that values fairness above all else. D. are rational and respond to incentives.

D

The decision about what goods and services will be produced made in a market economy is made by A. lawmakers in the government voting on what will be produced. B. workers deciding to produce only what the boss says must be produced. C. producers deciding what society wants most. D. consumers and firms choosing which goods and services to buy or produce. E. consumers dictating to firms what they need most.

D

Which of the following correctly describes the relationship between economic efficiency and economic equity? A. They are both automatically achieved in a free market economy. B. They always call for opposite outcomes. C. There is no conflict between the two goals. D. There is often a trade-off between the two.

D

a state of the economy in which production is in accordance with consumer preferences; every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

allocative efficiency

an economy in which the government decides how economic resources will be allocated

centrally planned economy

a simplified version of reality used to analyze real-world economic situations

economic model

something measurable that can have different values, such as the incomes of doctors

economic variable

the study of the choices people make to attain their goals

economics

the fair distribution of economic benefits

equity

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

macroeconomics

analysis that involves comparing marginal benefits and marginal costs

marginal analysis

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

market

an economy in which the decisions of households and firms interacting in markets allocate economic resources

market economy

the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

microeconomics

an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources

mixed economy

analysis concerned with what ought to be

normative analysis

the highest-valued alternative that must be given up to engage in an activity

opportunity cost

analysis concerned with what is

positive analysis

a situation in which a good or service is produced at the lowest possible cost

productive efficiency

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

scarcity

the idea that, because of scarcity, producing more of one good or service means producing less of another good or service

trade-off

a situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction

voluntary exchange