Chapter 1

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What is the definition of a market economy?

An economy where decisions about production and consumption are made by individual producers and consumers

What is the main difference between a market economy and a command economy?

In a market economy, there is a central authority making decisions, while in a command economy, decisions are made by individual producers and consumers

According to Principle #1 of economics, why are choices necessary?

Because resources are scarce and cannot satisfy all the ways society wants to use them

What is considered the true cost of something according to economics?

The opportunity cost of choosing that item over the next best alternative

Which branch of economics studies how people make decisions and how these decisions interact?

Microeconomics

What concept describes the way individual pursuit of self-interest can benefit society as a whole?

Invisible Hand

What is the purpose of the Production Possibility Frontier model?

To show the maximum quantity of goods that can be produced with given resources

What does economic growth result in, according to the text?

An expansion of production possibilities

What is opportunity cost defined as in the text?

What must be given up to get a good or service

Inefficient allocation in an economy means:

Producing more of some things without producing less of others

What does a country have if its opportunity cost of producing a good is lower than other countries'?

Comparative advantage

Which model provides a clear illustration of the gains from trade?

Comparative Advantage Model

What is the purpose of the Circular Flow Diagram according to the text?

To represent transactions in an economy

What is the main focus of 'marginal decisions' discussed in the text?

Comparing the costs and benefits of activities

What defines an 'incentive'?

A reward offered for changing behavior

How do markets usually reach equilibrium, as per Principle #6?

Via price changes until no better opportunities exist

What is the main concept behind 'specialization' in the context of trade?

Each person focuses on tasks they excel at

How do government policies intervene when markets fail to achieve efficiency?

By designing policies to improve resource allocation

What is the consequence of high overall spending in an economy, as described in Principle #11?

'Inflation', leading to a rise in prices throughout the economy

In economics, what does 'model' refer to?

A representation of reality used to understand real-life situations better

'Equilibrium' in markets means:

'Optimal allocation' of resources with no further gains possible

How do people usually respond to incentives according to the text?

By exploiting opportunities to make themselves better off

What is the main concept behind 'Mareginal Analysis' as discussed in the text?

Studying decisions about doing more or less of an activity

Test your knowledge on different types of economy systems such as market economy and command economy, as well as concepts like economic growth and recession.

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