CHAPTER 1 | Economics: Foundations and Models Brief Chapter Summary and Learning Objectives 1.1 Three Key Economic Ideas (pages 4–8) Explain these three key economic ideas: People are rational; people respond to economic incentives; and optimal decisions are made at the margin. ƒ People must make choices as they try to attain their goals. People make choices because resources are scarce. 1.2 The Economic Problem That Every Society Must Solve (pages 8–11) Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? ƒ A limited amount of resources will produce a limited amount of goods and services. ƒ The cost of producing more of one good is the value of what must be given up to produce it. 1.3 Economic Models (pages 11–15) Understand the role of models in economic analysis. ƒ Economists use models—simplified versions of reality—to analyze real-world issues. 1.4 Microeconomics and Macroeconomics (pages 15–16) Distinguish between microeconomics and macroeconomics. 1.5 A Preview of Important Economic Terms (pages16–17) Define important economic terms. Appendix: Using Graphs and Formulas (pages 24–35) Review the use of graphs and formulas. Key Terms Allocative efficiency, p. 11. A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. Centrally planned economy, p. 9. An economy in which the government decides how economic resources will be allocated. Economic model, p. 4. A simplified version of r