Chapter 1

Question 1

What is the definition of Microeconomics?

Answer 1

The Study of individual behavior in the economy, of the concepts of the larger economy.

Question 2

What does Ceteris Paribus mean?

Answer 2

The assumption of nothing else changing.

Question 3

What are opportunity costs?

Answer 3

Whatever must be given up to obtain some item.

Question 4

What are the 4 principles of how people make decisions?

Answer 4

1. Face Trade-offs
2. Opportunity costs
3. Rational people think at the margin
4. People respond to incentives.

Question 5

What are the 3 principles of how people interact?

Answer 5

5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes

Question 6

What are the 3 principles of how the economy works as a whole?

Answer 6

8. A country’s standards of living depends on its ability to produce goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run trade-off between inflation and unemployment

Question 7

What is Marginal Change?

Answer 7

A small incremental adjustment to an existing plan of action

Question 8

What is Adam Smith’s Invisible Hand Theory?

Answer 8

Participants in the economy are motivated by self-interest and that the “invisible hand” of the marketplace guides this self-interest into promoting general economic well-being