Ch. 1 and 2

Fiscal Policy
Economic policies that involve government spending and taxes.
Macroeconomics
The branch of economics that focuses on broad issues such as growth, unemployment, inflation and trade balance.
Microeconomics
The branch of economics that focuses on actions of particular agents within the economy, like the households, workers, and business firms.
Monetary Policy
Policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing.
Division of Labor
The way which the work required to produce a good or service is divided into tasks performed by different workers.
Economics
The study of how humans make choices under conditions of scarcity.
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Economies of Scale
When the average cost of producing each individual unit declines as total output increases.
Scarcity
When human wants for goods and services exceed the available supply.
Specialization
When workers of firms focus on particular tasks for which they are well-suited within the overall production process.
Allocative Efficiency
When the mix of goods being produced represents the mix that society most desires.
Comparative Advantage
When a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production.
Law of Diminishing Returns
As additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline
Production Possibilities Frontier (PPF)
A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.
Productive Efficiency
When it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service).
Invisible Hand
Idea that self-interested behavior by individuals can lead to positive social outcomes.
Normative Statement
Statement which describes how the world should be.
Positive Statement
Statement which describes the world as it is.
Circular Flow Diagram
A diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market.
Goods and Services Market
A market in which firms are sellers of what they produce and households are buyers.
Labor Market
The market in which households sell their labor as workers to business firms or other employees.
Theory (model)
A representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation.
Command Economy
An economy where economic decisions are passed down from government authority and where resources are owned by the government.
Exports
Products (goods and services) made domestically and sold abroad.
Globalization
The trend in which buying and selling in markets have increasingly crossed national borders.
Gross Domestic Product (GDP)
Measure of the size of total production in an economy.
Imports
Products (goods and services) made abroad and then sold domestically.
Market
Interaction between potential buyers and sellers; a combination of demand and supply.
Market Economy
An economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand.
Private Enterprise
System where the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals.
Traditional Economy
Typically an agricultural economy where things are done the same as they have always been done.
Underground Economy
A market where the buyer and sellers make transactions in violation of one or more government regulations.
Budget Constraint
All possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set.
Law of Diminishing Marginal Untility
As we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units.
Marginal Analysis
Examination of decisions on the margin, meaning a little more or a little less from the status quo.
Opportunity Cost
measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative
Opportunity Set
All possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.
Sunk Costs
Costs that are made in the past and cannot be recovered.
Utility
Satisfaction, usefulness, or value one obtains from consuming goods and services.
People have unlimited desires but limited resources. Economics tries to understand how we make decisions in such a world of ______ resources.
Scarce
Resources exist in limited supply, and as a result, economics is the study of how societies make decisions based on __________.
Scarcity
________ allows workers to do what they are best at to increase production.
Specialization
Which of the following is a microeconomic problem?
determining how many workers a firm needs to hire to maximize profit
Understanding the determinants of long-run economic growth is an example of a ________ problem.
Macroeconomic
Suppose that a central bank decides to lower interest rates to boost the economy. This is an example of a _______ policy.
Monetary
In the circular flow diagram, _______ is an example of a flow from households to firms.
Labor Services Performed
Which of the following best describes the tools economists use to examine and solve problems in the economy?
Theoretical Models
Firms are primarily ________ in the goods and services market and ________ in the labor market.
sellers, buyers
Which of the following increases as the level of globalization in a country increases?
Interest Rates
The value of the total amount of output produced in an economy in a given year is measured by ______.
Gross Domestic Product
If economic activity in a society is mostly organized and directed among the family, then this society is an example of a(n) ________ economy.
Traditional
A point ________ the budget constraint line indicates that the individual could have more of one good without having to give up any of the other.
below (inside)
What type of costs should firms and individuals ignore when making decisions?
Sunk Costs
“The fourth slice of pizza was good, but not as good as the third slice.” This illustrates the law of _________.
diminishing marginal utility
In the figure, movement from point A to point B leads to a _______ reduction in healthcare and a _______ increase in education because of the law of diminishing marginal returns.
small, large
Tradeoffs are illustrated by movements _______ the production possibilities curve.
Along
A society is at its production possibilities frontier, but it would like fewer resources spent on wars and more spent on education. Implementing this preference represents an improvement in ________.
Allocative Efficiency
The tools economists use to examine and solve problems in the economy?
theoretical models
Which of the following best describes the type of statement an op-ed piece in a newspaper urging the adoption of a particular economic policy?
Normative
In economics, the concept of scarcity means that _______ .
various economic decisions must be made to allocate resources efficiently
A tradeoff diagram illustrates that to _____ production of one good or service, you must ______ production of another good or service.
increase, decrease
Suppose you decide to quit your job as an accountant and open an ice cream store. In order to calculate the opportunity cost of your decision, you need to know _______.
the salary you would have earned as an accountant