Principles of Microeconomics Quiz #1

Chapters 1-2

Scarcity

The limited nature of society’s resources.

Economics

The study of how society manages its scarce resources.

Efficiency

Society gets the most from its scarce resources.

Equality

Prosperity is distributed uniformly among society’s members.

Opportunity cost

Whatever must be given up to obtain some item.

Rational people

Systematically and purposefully do the best they can to achieve their objectives.

Incentive

Something that induces a person to act.

Market

A group of buyers and sellers (need not be in a single location).

Market economy

Decentralized decisions of many firms and households as they interact in markets.

Invisible hand

Prices guide self-interested households and firms to make decisions that maximize society’s economic well-being.

Market failure

Market left on its own fail to allocate resources efficiently.

Externality

Production or consumption of a good affects bystanders (like pollution).

Market Power

A single buyer or seller has substantial influence on market price (monopolies).

Circular-flow diagram

Shows how dollars flow through markets among households and firms; a visual model of the economy.

Production Possibilities Frontier (PPF)

Combinations of output that the economy can possibly produce, given the available factors of production and technology.

Microeconomics

The study of how households and firms make decisions and how they interact in markets.

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth.

Positive statements

Descriptive, attempt to describe the world as it is.

Normative statements

Prescriptive, attempt to prescribe how the world should be.