Chapter 1 The Principles and Practice of Economics Questions 1. Why do we have to pay a price for most of the goods we consume? Answer: The inputs we use to produce most goods and services (for example, capital and labor) are scarce. Therefore, almost all goods and services are scarce compared to the quantity that consumers want to consume. In other words, at a price of zero the demand for most goods is higher than the available supply; our wants are unlimited, but our resources are not. Prices act as a rationing mechanism to prevent the over-consumption of such scarce goods, making them available in the quantity such that the supply of these goods matches the demand. 2. Many people believe that the study of economics is focused on money and financial markets. Based on your reading of the chapter, how would you define economics? Answer: Economics is the study of how agents (for example, households and firms) choose to allocate scarce resources and how these choices affect society. Although it is true that economics studies money and the financial markets, the study of economics is really focused on human behavior and choices. Given that we have limited resources, we need to choose between various options. Economic analysis is used to understand people‘s choices in order to describe what people do and recommend what people ought to do. 3. Examine the following statements and determine if they are normative or positive in nature. Explain your answer. a. Car sales in Europe rose 9.3 percent from 2014 to 2015. b. The U.S. government should increase carbon taxes to control emissions that cause global warming. Answer: a. This is an objective statement about the rate of growth in the European automotive industry. Positive economics is analysis that generates objective descriptions or predictions about the world that can be verified with data. Since data can be used here to verify the rate of growth, this is a positive statement. b. The statement that the government should increase carbon taxes to control emissions is normative since it states what the government ought to do. Normative economics advises individuals and society on their decisions and is almost always dependent on subjective judgments. 4. How does microeconomics differ from macroeconomics? Would the supply of iPhones in the United States be studied under microeconomics or macroeconomics? What about the growth rate of total economic output in the national economy? Answer: Microeconomics is the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources, and the well-being of other agents. Macroeconomics is the study of the economy as a whole. Macroeconomists study factors that affect overall – in other words, aggregate – economic performance. The supply of iPhones refers to the supply of a good by an individual firm, Apple. The iPhone market will be studied under microeconomics. Microeconomics studies how individuals,