definition and scope of economics

8/18/2019 Definition and Scope of Economics

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1. D EFINITION AND S COPE OF E CONOMICS

TRUE/FALSE

1. Economics is the study of how fairly goods and services are distributed within society.ANSWER: F

. Scarcity means that there is less of a good or resource available than !eo!le wish tohave. ANSWER: "#. Scarcity is the fundamental !roblem of the economy. ANSWER "$. %illionaires do not face the !roblem of scarcity. ANSWER F&. Scarcity is a !roblem only for the !oor. ANSWER F'. Resources are used to create goods and services. ANSWER "(. )n!uts in !roduction !rocesses are called resources. ANSWER "*. %oney is scarce+ but resources are not. ANSWER F,. An o!timal decision is one that chooses the most desirable from among all !ossibilities

that are available. ANSWER "1-. Economics studies the logic of choices made from among available !ossibilities. ANSWER

"11. Economics e amines the o!tions o!en to households+ business firms+ governments+ and

entire societies by the limited resources at their command. ANSWER "1 . Economics e amines the o!tions o!en to households and business firms+ but ignores the

o!tions of governments and entire societies. ANSWER F1#. Scarcity of resources im!lies that !eo!le must ma/e decisions consistent with the

means they have available to them. ANSWER "1$. 0iven its si e+ the 2nited States does not have to worry about limitations on resources.

ANSWER F1&. All actions and !urchases+ even those of wealthy !eo!le+ involve a sacrifice. ANSWER "1'. "radeoffs mean that you give u! one thing to get something else. ANSWER "1(. "he scarcity of !hysical resources is far more fundamental to the study of economics

than the scarcity of funds. ANSWER "1*. 0oods that are actually !roduced by firms are not really limited in su!!ly+ because the

firms can always !roduce more of them. ANSWER F1,. Although finished goods are scarce+ the in!uts to !roduce them are not scarce.ANSWER F

-. )f a society distinguished between needs and wants+ it is !ossible that resources wouldbe abundant for meeting the society3s needs but would be scarce for meeting its wants.ANSWER "

1. Although finished goods are scarce+ the in!uts to !roduce them are not scarce.ANSWER F

. )f a society distinguished between needs and wants+ it is !ossible that resources wouldbe abundant for meeting the society3s needs but would be scarce for meeting its wants.ANSWER "

#. 4oth !arties gain in a voluntary e change. ANSWER "$. "he field of economics is divided into two subfields: microeconomics and

macroeconomics. ANSWER: "&. %acroeconomics studies the factors that change national em!loyment and income.

ANSWER: "


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'. Normative statements describe how the world is+ while !ositive statements !rescribehow the world should be. ANSWER: F

(. 5Society would be better if the welfare system were abolished6 is a normativestatement+ not a !ositive statement. ANSWER: "

*. When economists are trying to e !lain the world they are acting as scientists+ and whenthey are trying to im!rove it+ they are !olicyma/ers. ANSWER: "

,. While the scientific method is a!!licable to studying natural sciences+ it is not useful instudying an economic system. ANSWER: F

#-. Since natural e !eriments offered by history can3t be used in economics+ carefullyconstructed laboratory e !eriments must be used. ANSWER: F

#1. An economic model can accurately e !lain how the economy is organi ed because it isdesigned to include every feature of the real world. ANSWER: F

# . All scientific models+ including economic models+ sim!lify reality in order to im!rove ourunderstanding of it. ANSWER: "

MULTIPLE CHOICE

1. "he word that comes from the 0ree/ word for 5one who manages a household6 isa. mar/et.b. consumer.c. !roducer.d. economy.

. "he word economy comes from the 0ree/ word fora. 5environment.6 b. 5one who manages a household.6 c. 5one who !artici!ates in a mar/et.6 d. 5conservation.6

#. 7ouseholds and economies have each of the following in common E89E " botha. must allocate scarce resources.

b. face many decisions.c. must allocate the goods and services they !roduce.d. must have a central decision ma/er.

$. Economics is defined as the study of a. business.b. how society manages its scarce resources.c. central !lanning.d. government regulation.

&. Economics is the study of a. how society manages its scarce resources.b. the government3s role in society.c. how a mar/et system functions.d. how to increase !roduction.

'. Economics is the study of the logic of a. rational decisions.b. decision;ma/ing activities.c. ends and means.d. choosing o!tions from those available.e. All of the above are correct.


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(. "he central or area of study for economists?a. how !eo!le ma/e decisionsb. how countries choose national leadersc. how !eo!le interact with each otherd. how forces and trends affect the overall economy

11. Economics deals !rimarily with the conce!t of a. scarcity.b. !overty.c. change.d. !ower.

1 . Which of the following is N=" included in the decisions that every society must ma/e?a. what goods will be !roducedb. who will !roduce goodsc. what determines consumer !referencesd. who will consume the goods

1#. 4oth households and societies face many decisions becausea. resources are scarce.b. !o!ulations may increase or decrease over time.c. wages for households and therefore society fluctuate with business cycles.d. !eo!le+ by nature+ tend to disagree.


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1$. A good is considered scarce in a society whena. more out!ut of the good is !ossible.b. everyone in that society cannot have all they want of the good.c. the government restricts !roduction of the good.d. only the richest !eo!le in the economy can buy all they want of the good.

1&. Scarcity e ists whena. there is less than an infinite amount of a resource or good.b. society can meet the wants of every individual.c. there is less of a good or resource available than !eo!le wish to have.d. the government fails to !roduce goods.

1'. A!!ro imately what !ercentage of the world3s economies e !erience scarcity?a. &@b. &-@c. (&@d. 1--@

1(. When a society cannot !roduce all the goods and services !eo!le wish to have it is saidthat the economy is e !eriencinga. scarcity.b. communism.c. e ternalities.d. mar/et failure.

1*. For society+ a good is not scarce if a. at least one individual in society can obtain all he or she wants of the good.b. firms are !roducing at full ca!acity.c. all members of society can have all they want of it.d. those who have enough income can buy all they want of the good.

1,. Which !roduct would be considered scarce?a. Ni/e shoesb. %onet !aintingsc. 1;carat diamondsd. All of the above are correct.

-. Which of the following goods best meets the definition of scarcity?a. airb. water in the oceanc. water in a cityd. wood in a forest

1. "he !roblem of scarcitya. has been 5coo/ed u!6 by disenchanted antica!italists.b. e ists because resources are limited relative to wants.c. is solved by !romoting economic growth.d. is caused by artificially high !rices.


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. 4ecause of scarcity+ every economic decision involvesa. a trade;off.b. a free good.c. a trade;in.d. an increasing cost.

e. a money !ayment.

#. Which of the following must co!e with scarcity?a. individualsb. com!aniesc. governmentsd. familiese. All of the above are correct.

$. A !rinci!le that economists em!hasi e is that the of decision ma/ers arealways limited.a. ideasb. goalsc. resourcesd. o!!ortunitiese. offices

&. )n economics+ ca!ital refers toa. the finances necessary for firms to !roduce their !roducts.b. buildings and machines used in the !roduction !rocess.c. the money households use to !urchase firms3 out!ut.d. the city where firms must a!!ly for the business license in their state.

'. Which of the following is considered by economists to be the most fundamentallyscarce?

a. moneyb. ideasc. needsd. foode. !hysical resources

(. "he main reason that finished goods are scarce is thata. raw material resources are scarce.b. factories are not o!erated efficiently.c. distribution systems are clogged.d. ta es are destroying wor/ incentives.e. All of the above are correct.

*. 7ow does scarcity affect the range of !ossible choices that decision ma/ers face?a. )t narrows the choice to a single o!tion.b. )t narrows the range of choices.c. )t increases the !ossible methods for solving !roblems.d. )t clarifies the choices by highlighting the best solutions.e. )t sim!lifies the choices and therefore widens the range.


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,. Scarcity is a conce!t that a!!lies to all of the following e ce!ta. time.b. natural resources.c. human wants.d. machinery.

#-. "he fundamental goal of economics is toa. allow everyone to have five yachts and two automobiles.b. redistribute income and eliminate !overty.c. reduce unem!loyment so that lower welfare !ayments are necessary.d. learn to co!e with the scarcity of virtually all resources.

#1. Economics is considered a social science becausea. it deals with the decisions by the government regarding how resources are

allocated.b. it deals with decisions that affect society.c. it deals with the economic decisions of individuals+ firms+ and the government.d. it uses the research methods of the !hysical sciences.

# . Every economic decision involves a trade;off because of a. theory.b. o!!ortunism.c. consum!tion.d. scarcity.e. efficiency.

##. )n most societies+ resources are allocated bya. a single central !lanner.b. those who own the resources.c. those firms that use resources to !rovide goods and services.d. the combined actions of millions of households and firms.

#$. Which is the best statement about the way economists study the economy?a. "hey study the !ast+ but do not try to !redict the future.b. "hey use a !robabilistic a!!roach based on correlations between economic events.c. "hey devise theories+ collect data+ then analy e the data to test the theories.d. "hey use controlled e !eriments much the same way a biologist or !hysicist does.

#&. 4y scientific method we meana. the use of modern electronic testing e


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#(. "he use of theory and observation is more difficult in economics than in sciences such as!hysics due to the difficulty ina. evaluating an economic e !eriment.b. devising an economic e !eriment.c. actually !erforming an e !eriment in an economic system.d. All of the above are correct.

#*. 4ecause it is difficult for economists to use e !eriments to generate data+ they generallymusta. do without data.b. use whatever data the world gives them.c. select a committee of economists to ma/e u! data for all economists to use.d. use hy!othetical+ com!uter;generated data.

#,. When testing theories+ economistsa. must ma/e do with whatever data the world gives them.b. can mani!ulate economic conditions easier than other scientific fields.c. can enlist the government3s hel! to mani!ulate economic conditions.d. can achieve statistically valid results with much smaller sam!le si es.

#*. =ne difficulty economists face that some other scientists do not is thata. unli/e other sciences+ economic studies must include the largest economic !layer+

the government.b. economists unfortunately receive less government funding than other scientists.c. cor!orations are reluctant to disclose necessary information for economic research.d. e !eriments are often difficult in economics.

$-. "he most common data for testing economic theories come froma. carefully controlled and conducted laboratory e !eriments.b. traditional economies.c. historical e!isodes of economic change.

d. centrally !lanned economies.

$1. For economists+ substitutes for laboratory e !eriments are oftena. natural e !eriments offered by history.b. com!uter;generated e !eriments.c. studies conducted by other disci!lines such as sociologists.d. well;constructed simulations.

$ . Economists ma/e assum!tionsa. to diminish the chance of wrong answers.b. to ma/e the world easier to understand.c. because all scientists ma/e assum!tions.d. to ma/e certain that all necessary variables are included.

$#. "he art of scientific thin/ing includesa. /nowing how the ma>or organs of the human body wor/.b. understanding every scientific fieldC!hysics+ biology and economics.c. deciding which assum!tions to ma/e.d. being able to mathematically e !ress natural forces.

$$. )f an economist develo!s a theory about international trade based on the assum!tionthat there are only two countries and two goods+


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a. the theory can be useful only in situations involving two countries and two goods.b. it is a total waste of time+ since the actual world has many countries trading many

goods.c. the theory can be useful in hel!ing economists understand the com!le world of

international trade involving many countries and many goods.d. the theory can be useful in the classroom+ but has no use in the real world.

$&. "he 1,(# war in the %iddle East !rovided economists with the o!!ortunity to observethe inverse relationshi! betweena. oil !rices and living standards.b. military buildu!s and government s!ending.c. the flow of crude oil and oil !rices.d. the flow of crude oil and !olitical !ower.

$&. 7istorical e!isodes are valuable to economists becausea. it allows economists to see how far the disci!line has evolved.b. hindsight is always -D -.c. it is easier to evaluate a !ast situation than to !redict a future situation.d. they allow economists to evaluate economic theories of the !resent.

$'. What would be the best statement about a theory based on assum!tions that are nottrue?a. )f the assum!tions underlying the theory are not true+ the theory must be false.b. "he ideas may be good in theory+ but not in !ractice.c. "he theory is a good one if it hel!s us to understand how the world wor/s.d. "he theory is a good one if no logical mista/es were made in develo!ing it.

$(. What is the goal of theories?a. to !rovide an interesting+ but not useful+ framewor/ of analysisb. to !rovo/e stimulating debate in scientific >ournalsc. to demonstrate that the develo!er of the theory is ca!able of logical thin/ing

d. to hel! scientists understand how the world wor/s

$*. When economists attem!t to sim!lify the real world and ma/e it easier to understandthey ma/ea. assum!tions.b. mista/es in >udgment.c. !redictions.d. evaluations.

$,. 0ood assum!tions cana. cause economists to leave out im!ortant variables which ma/e their theories

worthless.b. sim!lify the com!le world and ma/e it easier to understand.c. further com!licate an already difficult to!ic.d. allow economists to see the big !icture3 instead of only small segments.

&-. For a scientist+ the decision of which assum!tion to ma/e isa. the easiest !art of the scientific method.b. the fli! of a coin.c. almost im!ossible.d. !art art.


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&1. "he art of scientific thin/ing isa. easier with a solid mathematical bac/ground.b. the ability to ma/e an abstract sub>ect easy to understand.c. deciding which assum!tions to ma/e.d. not necessary to be an economist.

& . When scientists ma/e good assum!tions+ theya. greatly sim!lify the !roblem without substantially affecting the answer.b. further com!licate an already com!licated sub>ect.c. can leave out necessary variables that may result in incorrect answers.d. may not be able to reach an a!!ro!riate conclusion.

. An e am!le of a !roduct that e !eriences infre


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c. ma/ing assum!tions.d. reviewing statistical forecasts.

'-. A model isa. a theoretical abstraction with very little value.b. useful to only the ones who constructed it.

c. a realistic and carefully constructed theory.d. a sim!lification of real life.

'1. Which of the following is N=" true concerning models?a. %odels sim!lify reality.b. %odels can e !lain how the economy is organi ed.c. %odels assume away irrelevant details.d. %odels cannot be used to ma/e !redictions.

' . Which of the following is N=" true about most economic models?a. "hey are built using the tools of mathematics.b. "hey are useful to economists+ but not to !olicyma/ers.c. "hey do not include every feature of the economy.d. "hey are built using assum!tions.

'#. Which of the following is the most accurate statement about economic models?a. Economic models attem!t to mirror reality e actly.b. Economic models are useful+ but should not be used for !olicyma/ing.c. Economic models omit many details to allow us to see what is truly im!ortant.d. Economic models cannot be used in the real world because they omit details.

'$. "he foundation stones from which economic models are built area. economic !olicies.b. the legal system.c. assum!tions.

d. statistical forecasts.

'&. "he field of economics is traditionally divided into two broad subfields+a. national economics and international economics.b. consumer economics and !roducer economics.c. !rivate sector economics and !ublic sector economics.d. microeconomics and macroeconomics.

''. Which of the following would be considered a to!ic of study in macroeconomics?a. the im!act of agricultural !rice su!!ort !rograms in the cotton industryb. the effect on 2.S. steel !roducers of an im!ort


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a. im!act of minimum;wage laws on em!loyment in the fast food industry.b. effect of changes in saving rates on 0B .c. im!act of monetary !olicy on the rate of inflation.d. effect of ta !olicy on the rate of economic growth.

',. Which of the following is true?

a. %icroeconomics and macroeconomics are two se!arate divisions of economics+inde!endent of each other.

b. )t is !ossible to understand macroeconomics without understandingmicroeconomics+ but not vice versa.

c. %icroeconomics and macroeconomics are two distinct but closely intertwined fieldsof economics.

d. %icroeconomics and macroeconomics are two different names for basically the samething in economics.

(-. When economists are trying to e !lain the world they area. scientists.b. !olicy advisors.c. in the realm of normative economics.d. in over their heads.

(1. When economists are trying to hel! im!rove the world they area. concerned with !ositive economics.b. !olicy advisors.c. scientists.d. meddling.

( . Which is the best statement about the roles of economists?a. Economists are best viewed as !olicyma/ers.b. Economists are best viewed as scientists.c. )n trying to e !lain the world+ economists are !olicyma/ersG in trying to im!rove the

world+ they are scientists.d. )n trying to e !lain the world+ economists are scientistsG in trying to im!rove theworld+ they are !olicyma/ers.

(#. For economists+ statements about the world are of two ty!es:a. assum!tions and theories.b. true statements and false statements.c. s!ecific statements and general statements.d. !ositive statements and normative statements.

($. Which of the following is an e am!le of a !ositive statement?a. rices rise when the government !rints too much money.b. )f welfare !ayments increase+ the world will be a better !lace.c. )nflation is more harmful to the economy than unem!loyment.d. "he benefits to the economy of im!roved e


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a. im!roves the availability and


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,1. Which of the following is N=" a !ositive statement?a. 7igher gasoline !rices will reduce gasoline consum!tion.b. E


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1-$. A theory can best be defined asa. an untested assertion of untested fact.b. a collection of assum!tions that sim!lify the real world.c. an o!inion of a reliable !erson who studies a sub>ect or disci!line.d. a deliberate sim!lification of factual relationshi!s that attem!ts to e !lain how

those relationshi!s wor/.e. the body of /nowledge that has been scientifically verified by the scientific

community.

1-&. "o an economist+ theory can be thought of asa. abstraction for the sa/e of argument.b. one !erson3s o!inion+ which is >ust as good as another3s.c. another term for the descri!tion of a situation.d. beliefs which cannot necessarily be verified.e. e !lanation of mechanisms behind observed !henomena.

1-'. Which of the following statements is correct?a. "heory and hy!othesis are interchangeable terms for the same thing.b. A hy!othesis may result from a tested and confirmed theory.c. A theory may result from a tested and confirmed hy!othesis.d. A hy!othesis is a theory whose formulation relies on mathematics.

1-(. Buring one winter


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111. Economic theory is a necessity+ not a lu ury. "his statement is true because theorya. always leads to !ractical and useful !olicy.b. can !revent de!ressions in the economy.c. substitutes for vast amounts of data.d. !rovides a structure for organi ing and analy ing data.

e. always leads to accurate !redictions.

11 . olicy;oriented economists see/ to develo! theories toa. e !lain how things wor/ so !olicies can be formulated.b. describe what ha!!ened in a !articular time !eriod in history.c. describe current economic events.d. find correlations between events.e. change !eo!le3s values and ethics.

11#. )n the 1,th century+ Russian !easants noticed that during cholera e!idemics therewere lots of doctors aroundG in an attem!t to eliminate cholera+ they /illed all thedoctors. "his is an e am!le of a. mista/ing correlation with causation.b. the fallacy of o!!ortunism.c. e cessive abstraction.d. rationality.e. marginal analysis.

11$. An economic model can be defined asa. a testable claim which can be evaluated with !ro!er data.b. a re!resentation of a theory or a !art of a theory.c. another word for theory.d. a method to distinguish correlation from causation.e. All of the above are correct.

11&. Economists use models in order toa. e !eriment with alternative circumstances.b. ma/e educated guesses about real life events.c. !redict outcomes under various hy!othetical conditions.d. increase understanding of how a relationshi! actually wor/s.e. All of the above are correct.

11'. Why do economists tend to create models in diagrammatic form?a. Biagrams hide reality+ and theory is an attem!t to avoid reality.b. )t is easier than building models out of !hysical ob>ects.c. Economic reality cannot !ossibly be re!resented e ce!t in diagrams.d. %ost economists are frustrated artists+ and li/e to draw when !ossible.e. All of the above are correct.

11(. )s it !ossible to e !ress an economic model in words without diagrams?a. No+ models can only be stated in diagrams.b. No+ the very definition of model re


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11*. A useful economic modela. deals only with !ossibilities that actually occurred.b. ma/es only realistic assum!tions.c. may ma/e some unrealistic assum!tions in order to sim!lify a com!le reality.d. should avoid drawing conclusions that have !ublic !olicy im!lications+ since

economics is not eudgments.

11,. Economic models are often e !ressed ina. e


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1 &. Economic analysis and !olicy are made more difficult bya. having so much data to wor/ with.b. inade


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SHORT ANSWER APPLICATION/SCENARIO

1. What would ha!!en to the study of economics if scarcity disa!!eared?

Since economics is the study of how society allocates its scarce resources+ if there were

no scarcity+ there would be no need for economics. Everyone could have all the goodsand services they wanted. No one would have to ma/e decisions based on tradeoffs+because there would be no o!!ortunity cost associated with the decision. H)t is difficultto conceive of a situation where time is not scarce+ howeverI.

. 9arefully define the following terms and e !lain their im!ortance to the study ofeconomics.a. resourcesb. scarcity

a. Resources are the instruments !rovided by nature or by !eo!le that are used tocreate goods and services that humans want. "hey are scarce+ and include rawmaterials+ labor+ and ca!ital.

b. Scarcity is the general fact that humanity has less of resources and things than wewould li/e. Scarcity leads to the need for rational decisions regarding economicresources.

#. Bistinguish between scarcity and shortage.

Scarcity im!lies that !eo!le want more of a good than is freely available. Shortageim!lies that !eo!le want more than is available at the going !rice. All economic goodsare scarce+ whereas there are shortages only in the !resence of !rice ceilings that set!rice below e. the im!act of deregulation on the savings and loan industry

ANSWER: a+ b+ e+ g+ h+ and > are microeconomic to!ics. c+ d+ f+ and i are

macroeconomic to!ics.


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&. Which of the following statements are !ositive+ and which are normative?a. "he minimum wage creates unem!loyment among young and uns/illed wor/ers.b. "he minimum wage ought to be abolished.c. )f the !rice of a !roduct in a mar/et decreases+ other things e are normativestatements.

'. 9arefully define the following terms+ and e !lain their im!ortance in economics.a. abstractionb. theoryc. model

a. Abstraction is ignoring many details in order to focus on the most im!ortantelements of a !roblem. "he a!!ro!riate degree of abstraction de!ends on the to!icunder consideration.

b. "heory is a deliberate sim!lification of relationshi!s with the !ur!ose of e !laininghow those relationshi!s wor/. "heory is cause;and;effect reasoning.

c. A model is a sim!lified+ small;scale version of some as!ect of the economy. %ucheconomic analysis em!loys models of one or more !arts of the economy.

(. Why do economists abstract+ and is it a!!ro!riate?

Economists Hand other scientistsI abstract in order to be able to focus on /ey variables.)t is a!!ro!riate+ because the economy is very com!le G trying to /ee! trac/ of everythingis e tremely difficult. "hus+ economists focus on relevant variables and ignore those that areless relevant to the !roblem at hand. Abstraction allows focus on the forest instead of thetrees.

*. 9arefully distinguish between an economic theory and economic model.

An economic theory is a deliberate sim!lification or abstraction of factual relationshi!sthat attem!ts to e !lain how those relationshi!s wor/. )t is an e !lanation of themechanism behind observed !henomena. An economic model is a re!resentation of a theory

or a !art of a theory used to gain insight into cause and effect. A theory can give rise to alarge number of models. "hus+ a theory is logically !rior to a model+ and will ordinarily bemore inclusive than a model.

,. Why might well;educated economists disagree on a!!ro!riate !ublic !olicy in somesituations?

Economists might disagree because of im!erfect information+ different theories onrelevant cause;effect relationshi!s+ and because of their different values.


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1-. Su!!ose that one can read a gra!h that shows information about !rice and

definition and scope of economics

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