Module 1- Chapter 1 Study Guide

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Apr 3, 2024

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Chapter 1 Introducing the Economic Way of Thinking _____________________________________ ■ CHAPTER IN A NUTSHELL The major objective of this chapter is to acquaint the student with the subject of economics. The birth of the Levi Strauss Company introduces the heart of economics: Economics is about people making choices concerning the allocation of scarce resources. This story highlights the success of a young entrepreneur who combined the resources of land, labor, and capital to transform canvas into a new type of pants. Another purpose of this chapter is to introduce the economic way of thinking by explaining steps in the model-building process. Economists use models and theories to focus on critical variables, such as price and quantity consumed, by abstracting from other variables that complicate the analysis. The chapter closes with a discussion between positive economics and normative economics, which explains why economists sometimes disagree. ■ KEY CONCEPTS Capital Ceteris paribus Economics Entrepreneurship Labor Land Macroeconomics Microeconomics Model Normative economics Positive economics Resources Scarcity ■ LEARNING OBJECTIVES

1. Understand that if there was no scarcity there would be no such thing as economics. Economics is the study of scarcity and how we deal with it. 2. Understand that scarcity exists because we are unable to produce as much as we would like (our wants are unlimited while our means of production are limited). 3. List the factors of production: land, labor, and capital. 4. Distinguish between “macro” and “micro.” 5. Distinguish between “positive” and “normative” economic analysis. 6. Explain why economists are interested in relationships between economic variables. 7. Explain why theories enable us to discern relationships between economic variables. 8. Know how theories can be expressed. 9. Explain the limitations to the use of theories ■ COMPLETION QUESTIONS 1. Scarcity is the fundamental economic problem that human wants exceed the availability of time, goods, and resources. 2. Economics is the study of how individuals and society choose to allocate scarce resources to satisfy unlimited wants. 3. Factors of production classified as: land, labor, and capital are also called resources . 4. Macroeconomics applies an economywide perspective, which focuses on such issues as inflation, unemployment, and the growth rate of the economy. 5. Microeconomics examines small units of an economy, analyzing individual markets such as the market for personal computers. 6. A simplified description of reality used to understand and predict economic events is called a(an) model . 7. If the ceteris paribus assumption is violated, a model cannot be tested.

8. Positive economics uses testable statements. 9. Land is a shorthand expression for any natural resource provided by nature. 10.The physical plants, machinery, and equipment used to produce other goods. Capital goods are man-made goods that do not directly satisfy human wants is capital . 11.The mental and physical capacity of workers to produce goods and services is labor . 12. Entrepreneurship is the creative ability of individuals to seek profits by combining resources to produce innovative products. 13. Normative economics is the analysis based on value judgment. ■ MULTIPLE CHOICE 1. The condition of scarcity: a. cannot be eliminated. b. prevails in poor economies. c. prevails in rich economies. d. All of the answers above are correct. 2. The condition of scarcity can be eliminated if: a. people satisfy needs rather than false wants. b. sufficient new resources were discovered. c. output of goods and services were increased. d. None of the answers above are correct. 3. Which of the following is not a factor of production? a. A computer chip. b. The service of a lawyer. c. Dollars. d. All of the above are factors of production. e. None of the answers above are correct. 4. A textbook is an example of:

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a. capital. b. a natural resource. c. labor. d. None of the answers above are correct. 5. The subject of economics is primarily the study of: a. the government decision-making process. b. how to operate a business successfully. c. decision-making because of the problem of scarcity. d. how to make money in the stock market. 6. Which of the following is included in the study of macroeconomics? a. Salaries of college professors. b. Computer prices. c. Unemployment in the nation. d. Silver prices. 7. Microeconomics approaches the study of economics from the viewpoint of: a. individual or specific markets. b. the national economy. c. government units. d. economywide markets. 8. The definition of a model is a: a. description of all variables affecting a situation. b. positive analysis of all variables affecting an event. c. simplified description of reality to understand and predict an economic event. d. data adjusted for rational action. 9. Which of the following is a positive statement? a. I think we should pass a constitutional amendment to reduce the deficit. b. President X's way of dealing with the economy is better than President Y's. c. I hope interest rates come down soon. d. If taxes are raised, unemployment will drop. 10. "An increase in the federal minimum wage will provide a living wage for the working poor" is a: a. statement of positive economics. b. fallacy of composition. c. tautology. d. statement of normative economics. 11. Select the normative statement that completes the following sentence: If the minimum wage is raised: a. cost per unit of output will rise. b. workers will gain their rightful share of total income.

c. the rate of inflation will increase. d. profits will fall. 12. "The government should provide health care for all citizens." This statement is an illustration of: a. positive economic analysis. b. correlation analysis. c. fallacy of association analysis. d. normative economic analysis. 13. The software programs that make computer hardware useful in production and management tasks are: a. capital. b. labor. c. a natural resource. d. None of the answers above are correct. 14. An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. The phrase "ceteris paribus" means that: a. other relevant factors like consumer incomes must be held constant. b. the gasoline prices must first be adjusted for inflation. c. the theory is widely accepted but cannot be accurately tested. d. consumers' need for gasoline remains the same regardless of the price. 15. "The federal minimum wage causes higher unemployment among teenagers" is a: a. statement of positive economics. b. statement of normative economics. c. testable value judgment. d. fallacy of composition. 16. Which of the following would eliminate scarcity as an economic problem? a. Moderation of people's competitive instincts. b. Discovery of sufficiently large new energy reserves. c. Resumption of steady productivity growth. d. None of the answers above are correct. 17. All of the following are examples of capital except: a. the robot used to help produce your car. b. a computer used by your professor to write this exam. c. the factory that produces the costume jewelry you buy. d. the inventory of unsold goods at your local hardware store. e. an uncut diamond that you discover in your backyard. 18. Which of the following would not be classified as a capital resource? a. The Empire State Building. b. A Caterpillar bulldozer.

c. A Macintosh computer. d. 100 shares of stock in General Motors. 19. If a textbook price rises and then students reduce the quantity demanded of textbooks, an economic model can show a cause-and-effect relationship only if which of the following occurs? a. Students' incomes fall. b. Tuition decreases. c. The number of students increases. d. All other factors are held constant. e. The bookstore no longer accepts used book trade-ins. 20. Which of the following is true about renewable resources? a. Land resources include oil, coal, and natural gas that have a fixed stock. b. Land resources include irrigation networks and wastewater treatment plants that utilize water. c. Land resources include air filtration systems in buildings that renew and refresh polluted air from the outside. d. Land resources include forests, range lands, and marine fisheries that naturally regenerate. ■ TRUE OR FALSE 1. T F All human wants cannot be satisfied because of the problem of scarcity. 2. T F Economics is the study of people's making choices faced with the problem of unlimited wants and limited resources. 3. T F Policies to determine the price of troll dolls are a concern of macroeconomics. 4. T F Policies to increase the supply of money in the economy are primarily a concern of microeconomics. 5. T F The statement "A tax hike for the rich is the fairest way to raise tax collections" is an example of positive economic analysis. 6. T F The statement "The income tax is unfair to those who work hard to earn their incomes" is an example of positive economic analysis. 7. T F The statement "It would be better to put up with price controls than to have continuing higher medical care prices" is an example of normative economic analysis.

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8. T F The statement "Cutting government spending is the best way to boost consumer confidence" is an example of normative economics. 9. T F The statement "It is better to suffer a little more unemployment and a little lower prices" is an example of normative economic analysis. 10. T F The statement "American workers are lazy" is an example of positive economic analysis.

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