Chapter 1 – The Study of Choice
Read pages 1-16
I – What is Economics?
A) Scarcity, Choice and Cost
1) 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 methods
1) 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)
b)
c)
d)
deciding to get married.
deciding to purchase an automobile.
deciding to purchase a second cola.
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.