Economics Chapter 1 And 2 Test Questions – Flashcards
Unlock all answers in this set
Unlock answersquestion
the study of how people choose to use their limited resources to satisfy their unlimited wants
answer
economics
question
a system used to manage limited resources for the production, distribution, and consumption of goods and services
answer
economy
question
the branch of economics that uses objective analysis to find out how the world works; the goal is to describe how things are
answer
positive economics
question
the branch of economics that applies value judgements to data in order to recommend actions or policies; the goal is to advise how things ought to be done
answer
normative economics
question
the condition that results because people have limited resources and unlimited wants
answer
scarcity
question
the exchange of one benefit or advantage for another that is thought to be better
answer
tradeoff
question
a way to compare the costs of an action with the benefits of the action; if benefits exceed costs, then the action is worth taking
answer
cost-benefit analysis
question
any factor that encourages or motivates a person to do something
answer
incentive
question
a puzzle or riddle that may be explained through economic analysis
answer
economic enigmas
question
anything used to produce an economic good or service
answer
resource
question
the study of the workings of an economy as a whole
answer
macroeconomics
question
the study of the economy at the level of individuals, households, and businesses
answer
microeconomics
question
the idea that limited resources force people to make choices and face tradeoffs when they choose
answer
scarcity-forces-tradeoffs principle
question
the idea that every choice involves tradeoffs; a restatement of the scarcity-forces-tradeoffs principle
answer
no-free-lunch principle
question
what is spent in money, effort, or other sacrifices to get something
answer
cost
question
what is gained from something in terms of money, time, experience, or other improvements
answer
benefits
question
the idea that people choose something then the benefits of doing so outweigh the costs
answer
costs-versus-benefits principle
question
the border or outer edge of something
answer
margin
question
the idea that many decisions involve choices about using or doing a little less of something rather than making a wholesale change
answer
thinking-at-the-margin principle
question
what is given up by adding one more unit to an activity
answer
marginal cost
question
what is gained by adding one more unit to an activity
answer
marginal benefit
question
the idea that people respond to incentives in generally predictable ways
answer
incentives-matter principle
question
the idea that people benefit by focusing on what they do well and then trading with others, rather than trying to do everything for themselves
answer
trade-makes-people-better-off principle
question
an arrangement that brings buyers and sellers together to do business with each other
answer
market
question
the idea that markets are usually the best way to coordinate exchanges between buyers and sellers
answer
markets-coordinate-trade principle
question
Adam Smith's metaphor to explain how an individual's pursuit of economic self interest can promote the well-being of a society as a whole
answer
invisible hand
question
the idea that decisions made today have effects in the future
answer
future-consequences-count principle
question
the general observation that the actions of people and governments always have effects that are not expected or intended
answer
Law of Unintended Consequences
question
Is there an answer to the question of why some nation and people are wealthy/poor?
answer
no
question
Who is Adam Smith?
answer
a political economist and philosopher who later became Scotland's commissioner of customs
question
What did Adam Smith write and when was it published?
answer
"The Wealth of Nations" in 1776
question
What document shares numerous similarities with "The Wealth of Nations"?
answer
The Declaration of Independence
question
What is the key to a healthy economy?
answer
competition
question
What happens when governments don't interfere with the economy?
answer
nations prosper
question
What type of system should governments have with the economy?
answer
a "hands off" system; laissez-faire
question
Do economics have a big or small impact on your everyday life?
answer
both
question
Explain Smith's quote: "Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life."
answer
People not only want the basic necessities (food, clothing and shelter), but also things that make life easier, or more convenient, and the more of these things that they have, the richer they are
question
What is Smith's title?
answer
the father of modern economics
question
How does learning about economics impact your ability to make decisions?
answer
it helps you make sound decisions in almost every area of your life
question
Who wrote the book "Freakonomics"?
answer
economist Steven Levitt and journalist Stephen Dubner
question
What does "Freakonomics" say economics is about and who agreed with this statement?
answer
looking beneath the surface of modern life; Smith
question
What does economist Steven Landsburg believe economics is all about?
answer
finding and solving mysteries
question
What did Steven Landsburg write and when?
answer
"The Armchair Economist: Economics and Everyday Life" in 1993
question
What is an example of a large economic mystery?
answer
why the economy grows and shrinks
question
What is an example of an economic mystery that common people think about?
answer
why popcorn costs more at movies than at grocery stores
question
What types of questions does economics have a lot to do with?
answer
questions that reveal the hidden side of everything
question
How has economics been traditionally defined?
answer
how people use limited resources to satisfy their unlimited wants
question
Who does the concept that people use limited resources to satisfy their unlimited wants go back to and what book did he write?
answer
Greek author Xenophon; Oeconomicus
question
Why are resources limited?
answer
they exist in finite amounts that can be used for multiple things
question
Even when we have enough of certain things to satisfy us, we always ________.
answer
want more of other things
question
What two branches do economists divide their study of how people use their scare resources in?
answer
macroeconomics and microeconomics
question
Who is Alfred Marshal?
answer
an influential 19th century economist
question
How did Alfred Marshal describe economics?
answer
as a study of mankind in the ordinary business of life
question
What is economics the science of?
answer
decision making; how people make choices when they cannot have everything they want
question
What are economists often asked to offer advice on?
answer
on what should be done and how to make things better
question
What are the two types of economics that focus on how things are and what ought to be done
answer
positive and normative economics
question
Which section of economics are most economists in?
answer
positive economics
question
What are the seven principles that guide an economic way of thinking?
answer
scarcity forces tradeoff, cost versus benefits, thinking at the margin, incentives matter, trade makes people better off, markets coordinate trade, and future consequences count
question
Although our desire for things are _________, the resources we desire are ________.
answer
unlimited; scarce
question
What will we always have to make because of the scarcity of our resources?
answer
tradeoffs
question
What is another name for the scarcity-forces-tradeoff principle?
answer
the no-free-lunch principle
question
What do people usually make choices based upon?
answer
the expected costs and benefits; they often choose something when the benefits outweigh the costs
question
What tool do economists use that involves a list of the costs and benefits of a choice?
answer
a cost-benefit analysis
question
When are we thinking at the margin and what does this mean?
answer
when we add or subtract one more unit to or from what we already have; a little more of this, a little less of that
question
What does making a decision at the margin involve?
answer
comparing marginal costs and benefits
question
When costs and benefits influence our behavior, what are they acting as?
answer
incentives
question
How do people respond to incentives?
answer
in generally predictable ways
question
What do economists do when they want to understand why people do what they do?
answer
start looking for incentives
question
What is an example of a positive incentive?
answer
teachers use points and grades to encourage students to do their work
question
What is an example of a negative incentive?
answer
governments use fines and jail to discourage people from breaking laws
question
Who understood that none of us are equally skilled at doing everything?
answer
Smith
question
Because none of us are equally skilled at everything, what is it best to concentrate on?
answer
what we do best and trade with others for what they do best
question
Where can a market exist (give an example of each)?
answer
in a single space (flea market) or in a cyberspace (online auction site)
question
What happens when a market operates freely or with limited government interference?
answer
buyers and sellers can trade with each other until both are satisfied
question
What did Smith use to describe the coordination of markets?
answer
the invisible hand metaphor
question
How efficient are markets?
answer
very
question
When making decisions, what costs do most people only look at and why is this bad?
answer
the short-term costs; most decisions they make have longer-term effects
question
What principle does Henry Hazlitt believe separates the good economist from the bad?
answer
future consequences count
question
When making a decision, what must you try to imagine in order to think like an economist?
answer
all of the possible outcomes of a decision
question
What do economists spend a lot of time trying to predict?
answer
unintended consequences
question
physical articles that have been produced for sale or use
answer
goods
question
work done by someone else for which a consumer, business, or government is willing to pay
answer
services
question
a lack of something that is desired
answer
shortage
question
a resource used in the production process; also known as a factor of production
answer
input
question
the resources used to produce goods and services; land, labor, and capital
answer
factors of production
question
the goods or services generated by the production process
answer
output
question
a formula used to represent the production process: land + labor + capital = goods and services
answer
production equation
question
the willingness and ability to take the risks involved in starting and managing a business
answer
entrepreneurship
question
a person who assembles and organizes the resources necessary to produce goods and services
answer
entrepreneur
question
all natural resources, including energy, that are used to produce goods and services; one of the factors of production
answer
land
question
A natural resource that is widely available and in no danger of being used up
answer
perpetual resource
question
A natural resource that, with careful planning, can be replaced as it is used
answer
renewable resources
question
A natural resource that cannot be replaced once it is used
answer
nonrenewable resources
question
The time and effort people devote to producing goods and services in exchange for wages; one of the factors of production
answer
labor
question
The knowledge and skills people gain from education, on-the-job training, and other experiences
answer
human capital
question
A relationship between two factors, pieces of data, or other variables
answer
correlation
question
money used for investment or production
answer
financial capital
question
The man made objects (tools, machinery, buildings, and other goods) used in production; also called capital goods
answer
physical capital
question
The man made objects (tools, machinery, buildings, or other fabricated goods) used in production; also called physical capital
answer
capital goods
question
The tools, machines, and buildings used to produce goods and services
answer
capital
question
A measure of the efficiency with which goods and services are produced; often stated as the quantity produced per person per hour
answer
productivity
question
The pleasure, satisfaction, or benefit a person receives from consuming a product or service or from taking an action
answer
utility
question
The value of the next best alternative that is given up when making a choice. This is the measure of what you must give up to get what you most want
answer
opportunity cost
question
The extra satisfaction or pleasure achieved from an increase of one additional unit of a good or service
answer
marginal utility
question
A lack of pleasure or satisfaction from consuming a product or service or taking an action
answer
negative utility
question
The general observation that as the quantity of a good or service consumed increases, the benefits for the consumer of each additional unit decrease
answer
law of diminishing utility
question
A simple model of an economy that shows all the combinations of two goods that can be produced with the resources and technology currently available
answer
production possibilities frontier (PPF)
question
A graph showing the combinations of two goods that can be produced with a given set of resources
answer
production possibilities curve
question
The result of using resources in a way that produces the maximum amount of goods and services
answer
economic efficiency
question
Can you always get what you want?
answer
no
question
How does using the economic way of thinking help us?
answer
it helps us decide what we want most and what we are willing to give up to get it
question
What always exceeds our resources?
answer
our wants
question
While our desire for things that meet our needs are unlimited, what is limited?
answer
our means of filling those desires
question
What are our desires limited by?
answer
our imagination
question
What is limited for everyone, whether they are rich or poor?
answer
money and time
question
Why is it hard for people to see scarcity like economists do?
answer
most people think "How can these goods be scarce it everyone seems to have them?"
question
To economists, are services scarce?
answer
yes
question
Why are goods and services scarce?
answer
the resources needed to produce them are scarce
question
Would scarcity still exist if the world was rich?
answer
yes; even if money is less scarce, the other resources would still be scarce
question
What are two examples of a cause for a shortage?
answer
a fashion fad and wars/natural disasters
question
Are shortages usually permanent or temporary?
answer
temporary
question
When do shortages usually end?
answer
once production resumes or new sources of supply are found
question
Why is scarcity forever?
answer
there will never be enough of the limited resources to satisfy everyone's wants
question
How do economists answer the question: Everything is produced to satisfy somebody's wants, but how?
answer
by looking at the inputs and outputs of the production process
question
What are the three basic categories that the factors of production are divided into?
answer
land, labor, and capital
question
What is the production equation used to represent?
answer
the combining of resources (inputs) to produce goods and services (outputs)
question
What is the production equation?
answer
land + labor + capital = goods and services
question
What do some economists consider as a fourth factor of production and why?
answer
entrepreneurship because entrepreneurs assemble the other inputs to create new goods and services
question
Other than real estate, what do economists see land as?
answer
all of the "gifts of nature" (natural resources) that are used to produce goods and services
question
What is an example of a perpetual resource?
answer
sunlight and wind
question
What is an example of a renewable resource?
answer
forests and freshwater
question
What is an example of a nonrenewable resource?
answer
oil and coal
question
What are some familiar natural resources?
answer
air, soil, minerals, water, forests, etc.
question
What are some less obvious natural resources?
answer
solar energy, wind, geothermal energy, and the electromagnetic spectrum used to transmit communication signals
question
What does the value of natural resources depend upon?
answer
someone knowing how to work them into the production process (oil was available under the surface of Earth for millions of years before someone developed a way to get to it and give it a use)
question
What does labor include?
answer
both physical labor (planting crops) and mental activity (writing legal briefs)
question
What does the QUANTITY of labor in a country depend upon?
answer
the size of its population and people's willingness to work
question
What does the QUALITY of the labor in a country depend upon?
answer
how skilled the workers are, or what economists refer to as human capital
question
What is human capital (not definition)?
answer
what you would be left with if all of your assets are stripped away (according to Charles Wheelan)
question
Why is human capital important?
answer
because workers with high human capital are more productive and earn more money than those with few skills
question
A country's human capital and what are highly correlated?
answer
standard of living
question
The correlation between what and what is weak?
answer
a country's natural resources and living standard
question
Who estimated that about 75 percent of the wealth of a modern economy consists of the education, training, and skills of its people?
answer
Gary Becker
question
Is money an important part in the production process?
answer
not directly
question
What are the important parts in the production process (capital section)?
answer
tools, machines, and factory buildings that money can buy, which is then used in the production or other goods and services (sometimes called physical capital or capital goods)
question
What do economists refer to money used to buy real estate or investments as?
answer
financial capital
question
What are some examples of capital?
answer
factories, airports, roads, the Internet
question
Although capital has replaced labor in one area after another since the Industrial Revolution, every advance in physical capital results in what?
answer
more labor because someone has to design, produce, and maintain the new machines
question
What is entrepreneurship?
answer
a specialized and highly valued form of human capital and entrepreneurs perform several roles in the production process
question
What are the four roles that entrepreneurs play in the production process?
answer
innovator, strategist, risk taker, and sparkplug
question
Explain how entrepreneurs are innovators.
answer
they think of ways to turn new inventions, technologies, or techniques into goods or services that people will want
question
Explain how entrepreneurs are strategists.
answer
they supply the vision and make the key decisions that set the course for new business enterprises
question
Explain how entrepreneurs are risk takers.
answer
they take on the risks of starting new businesses; invest their time, energy, abilities, and money, not knowing whether they will succeed or fail
question
Explain how entrepreneurs are sparkplugs.
answer
they supply the energy, drive, and enthusiasm needed to turn ideas into realities (Nolan Bushnell)
question
How can we increase the productivity of our economy?
answer
By using the factors of production more effectively
question
How is productivity determined?
answer
productivity = output÷input
question
What is productivity stated as?
answer
a ratio of output per unit of input
question
What are the two ways in which productivity can be raised?
answer
By getting more output from the same inputs or by getting the same output from fewer inputs
question
Why are decisions often difficult?
answer
something often has to be given up when we make a choice
question
How do people seek to make themselves as well off as possible?
answer
by maximizing the utility of their decisions
question
How do we gain utility?
answer
by making choices that, while not all that pleasurable, are more likely to improve our lives
question
Why is it hard to maximize utility?
answer
we don't usually have enough information to know if we are making the right choice
question
What does every decision we make involve?
answer
giving up one thing for another; tradeoffs
question
When do businesses face tradeoffs?
answer
when they try to maximize their utility of their land, labor, and capital
question
Does society face tradeoffs?
answer
yes
question
Does every decision have a cost?
answer
yes
question
What do we lose when we choose one course of action?
answer
the utility or benefits, of the alternatives you did not choose
question
What is the opportunity cost?
answer
the option that you didn't choose when you were facing a tradeoff; it is simply the value of the next best choice, whether you have 2 or 200 choices
question
How does using a decision matrix help?
answer
it helps you sort through all of the possible alternatives to a decision; it lists all of the alternatives in the decision as well as the factors that might be used in evaluative those alternatives
question
Are most decisions an all or nothing choice?
answer
no; instead you apply the thinking-at-the-margin principle by looking at the marginal utility of one alternative over another
question
What does the amount of satisfaction we get from something usually depend upon?
answer
how much of that something we already have
question
What could happen if you keep having the same thing over and over again?
answer
you might get a negative utility; the marginal utility of something diminishes as we get more of it
question
What is the PPF?
answer
an economic model, in the form of a line graph, that shows how an economy might use its resources to produce two goods and helps us see the tradeoffs involved in devoting more resources to the production of one good to the other
question
What is another name for the production possibilities frontier?
answer
production possibilities curve
question
What can a PPF also be used to measure?
answer
the opportunity costs of different production choices
question
What happens as one moves along the line on a PPF?
answer
the opportunity cost of something changes
question
What can the PPF help us see?
answer
how efficient our choices are; every point on the PPF represents an efficient use of resources to produce that combination of outputs
question
What does every point in the shaded area inside the PPF represent?
answer
a less efficient, but still attainable, production possibility
question
What does every point outside the PPF represent?
answer
an unattainable production possibility
question
What is a PPF a snapshot of?
answer
an economy's production possibilities at a specific moment in time and these conditions are constantly changing as economic conditions change
question
What do economists say when an economy grows?
answer
the PPF has "shifted to the right" (productivity increases, jobs are more plentiful, and living standards improve)
question
What do economists say when an economy shrinks?
answer
the PPF "shifts to the left" (productivity falls, unemployment rises, and living standards decline)
question
What is the most important type of decisions you make?
answer
how to maximize your human capital, and with that, your future earning power
