Chapter 1 – The Study of Choice Read pages 1-16I – What is Economics?

A) Scarcity, Choice and Cost1) Economics is a social science that

examines how people choose among the alternatives available to them.

2) Scarcity is the condition of having to choose among alternatives.

3) A scarce good is one for which the choice of one alternative requires that another be given up

4) A free good is one for which the choice of one use does not require that we give up another.

5) Opportunity cost is the value of the best alternative foregone in making any choice.

B) Scarcity and the Fundamental Economic Questions

1) What should be produced?

2) How should goods and services be produced?

3) For whom should goods and services be produced?

II The Economic Way of Thinking

A) Three features which distinguish economics from other social sciences.

1) Special emphasis to opportunity costs.

2) Agents optimize.

3) Agents make choices at the margin.

B) More Terms

1) The margin is the current level of an activity.

2) A choice at the margin is a decision to do a little more or a little less of something.

C) Distinguishing Microeconomics and Macroeconomics

1) Microeconomics is the branch of economics that focuses on the choices made by consumers and firms and the impacts those choices have on individual markets.

2) Macroeconomics is the branch of economics that focuses on the impact of choices on the total, or aggregate, level of economic activity.

III - Economics and the Scientific Method

A) Formal methods1) A variable is something whose value can

change.2) A constant is something whose value does

not change.3) A hypothesis is an assertion of a

relationship between two or more variables that could be proven to be false.

4) A hypothesis that has not been rejected after widespread testing and that wins general acceptance is called a theory.

5) A theory that has been subjected to even more testing and that has won virtually universal acceptance becomes a law.

B) Models in Economics

1) A model is a set of simplifying assumptions about some aspect of the real world.

C) Hypothesis testing

1) Ceteris paribus is a Latin phrase that means “all other things unchanged.”

2) A variable that responds to the change is called the dependent variable.

3) A variable that induces a change is called the independent variable.

4) Reaching the incorrect conclusion that one event causes another because the two events tend to occur together is called the fallacy of false cause.

5) A statement of fact or a hypothesis is a positive statement.

6) A normative statement is one that makes a value judgment.

IV - Sample exam questions.1) An economic model

a) provides a perfect description of the world.

b) never deviates from reality by making simplifying assumptions.

c) helps explain the functioning of the world around us.

d) plays no role in hypothesis testing.

c) is correct.

2) A choice to direct more government spending toward education at the expense of reduced spending on the military

a) may be informed by substantial positive analysis but ultimately reflects the normative decision of the nation’s leaders.

b) is made without incurring opportunity cost.

c) is not an example of a marginal decision.d) need not be made, because the

government is not confronted by scarcity.

a) is correct.

3) The scientific method establishes “laws” by

a) consulting authorities who state what is correct.

b) repeatedly testing a theory until the theory is nearly universally accepted.

c) examining propositions that must be true.

d) consulting ancient documents.

b) is correct.

4) Which of the following is the best example of a marginal decision?

a) deciding to get married.

b) deciding to purchase an automobile.

c) deciding to purchase a second cola.

d) deciding to have a second child.

c) is correct.

5) The disagreement between economists

a) is proof that economics is not a science.

b) would be eliminated by more definitive government action.

c) is easy to eliminate by controlling for all factors.

d) may serve to spur innovation and exploration into economics.

d) is correct.