Table Of ContentSTUDY GUIDE TO ACCOMPANY
GWARTNEY, STROUR AND CLARK'S
ESSENTIALS OF ECONOMICS
SECOND EDITION
J.R. CLARK Fairleigh Dickinson University
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PREFACE
This Study Guide is designed as a valuable sup 2. Seek out prompt, accurate feedback re
port tool for the student using the second edition garding what you have learned Timely
of Essentials of Economics. It provides several feedback reinforces correct concepts and
important features that contribute to a good helps to dispel misconceptions. The an
course—features that cannot be included in the swers to the self-test questions provided in
standard textbook. If used correctly, it will im the Study Guide are intended to give you
prove your understanding of, and ability to apply, this type of feedback. They should be used
economic principles to everyday decision responsibly. If you encounter a question to
making. which the correct answer is puzzling, you
In order to get the most out of this course it is should discuss the matter with the instruc
important that you follow these four steps: tor while the issue is still fresh in your mind.
1. Actively participate in the learning Also, the Study Guide should be used reg
process Active participation implies a ularly as you move through the weekly ma
great deal more than taking notes in class, terial. If a significant interval elapses
memorizing them the night before the between reading the text and working in
exam, and hoping for the best. Active the Study Guide, much of the value of using
learning requires that you interact with the the Study Guide will be lost. Your regular,
class, the instructor, and the text material. timely use of it will give you a clear compet
The self-tests in Sections 1 and 2 of each itive edge over the student who does not
chapter of this Study Guide will assist you use it properly.
in this effort. After having read the text 3. Learn the relevance of the concepts
material, you should review the learning Relevance is both a motivational force and
objectives at the end of each chapter and a guide to application. If you understand
then try to answer the self-test questions the relevance of a particular concept to your
in this Study Guide. If you cannot answer everyday life, the material will be learned
most of these questions correctly, the text faster and retained longer. The text and this
material should be reviewed further. Next Study Guide are designed to stress the eco
you should try the challenge questions in nomic way of thinking. That is, they teach a
Section 4. These questions are multiple method of inquiry that enables you to make
choice and are of a broader nature than not only purely economic decisions but also
those in Sections 1 and 2. Consequently, many other types of decisions that affect
they will be more of a test of what you truly your everyday life. The problems and proj
understand. Challenge yourself with these ects sections of the Study Guide require
questions. that you carefully think through proble-
xii Preface
matic situations and reason in an economic In closing, a word about evaluation is appro
manner. You should complete these sec priate. Questions very much like those that ap
tions in each chapter while considering how pear in the self-tests and challenge questions
the concepts they present could be trans sections of the Study Guide also appear in the
ferred to your own decision making. The Instructors Manual and Test Bank. Many in
seven guideposts to economics at the begin structors will draw their exam questions from this
ning of the text are also valuable in this source. Although not identical to those in the
regard. self-tests, these questions have been designed so
4. Learn to address economic issues and poli that the student who can answer the self-test
cies critically The Perspectives in Eco questions will consistently be able to answer
nomics section of each chapter in this Study those in the Test Bank. Thus it is to your advan
Guide presents articles on current issues tage to use the Study Guide.
written from provocative points of view.
ACKNOWLEDGEMENTS
Each article ends with a set of critical dis
cussion questions. After having read each Woody Studenmund and Rick Stroup contrib
perspective and considered the discussion uted substantially to this volume in the original
questions, you should be able to critically collection of Perspectives in Economics and mul
evaluate the issue on your own. Through tiple-choice questions. My debt to them is espe
this process you will develop analytical cially great, and their scholarship is appreciated.
skills and the ability to verbalize your criti Glenys Hardy, while a student at Fairleigh Dick
cal analyses. You should learn to formulate inson University, contributed much time, effort,
your own economic policies and to support and expertise to the development of the chal
your suggestions with sound economic lenge questions sections. In addition, Mary Ann
arguments. Duncan provided her outstanding word-process
If you follow these four steps, your experience ing skills and Rob Greenfield stimulated some of
in this economics course may be one of the most the questions raised in this volume with his usual
valuable ones of your life. The decade of the gadfly sense of economic humor. Finally, the
1980s is quickly becoming the "age of the econo contributions of Susan Loring and Sue Miller
mists." What you learn in this course may well should be noted. They did an excellent job of
influence your career and your happiness — and converting a ragtag manuscript into a professional
perhaps even the future of our national economy. product in an unreasonably short period of time.
With so much at stake it would seem wise to
follow carefully the structured course of action J.R. Clark
described above. March 1984
xii Preface
matic situations and reason in an economic In closing, a word about evaluation is appro
manner. You should complete these sec priate. Questions very much like those that ap
tions in each chapter while considering how pear in the self-tests and challenge questions
the concepts they present could be trans sections of the Study Guide also appear in the
ferred to your own decision making. The Instructors Manual and Test Bank. Many in
seven guideposts to economics at the begin structors will draw their exam questions from this
ning of the text are also valuable in this source. Although not identical to those in the
regard. self-tests, these questions have been designed so
4. Learn to address economic issues and poli that the student who can answer the self-test
cies critically The Perspectives in Eco questions will consistently be able to answer
nomics section of each chapter in this Study those in the Test Bank. Thus it is to your advan
Guide presents articles on current issues tage to use the Study Guide.
written from provocative points of view.
ACKNOWLEDGEMENTS
Each article ends with a set of critical dis
cussion questions. After having read each Woody Studenmund and Rick Stroup contrib
perspective and considered the discussion uted substantially to this volume in the original
questions, you should be able to critically collection of Perspectives in Economics and mul
evaluate the issue on your own. Through tiple-choice questions. My debt to them is espe
this process you will develop analytical cially great, and their scholarship is appreciated.
skills and the ability to verbalize your criti Glenys Hardy, while a student at Fairleigh Dick
cal analyses. You should learn to formulate inson University, contributed much time, effort,
your own economic policies and to support and expertise to the development of the chal
your suggestions with sound economic lenge questions sections. In addition, Mary Ann
arguments. Duncan provided her outstanding word-process
If you follow these four steps, your experience ing skills and Rob Greenfield stimulated some of
in this economics course may be one of the most the questions raised in this volume with his usual
valuable ones of your life. The decade of the gadfly sense of economic humor. Finally, the
1980s is quickly becoming the "age of the econo contributions of Susan Loring and Sue Miller
mists." What you learn in this course may well should be noted. They did an excellent job of
influence your career and your happiness — and converting a ragtag manuscript into a professional
perhaps even the future of our national economy. product in an unreasonably short period of time.
With so much at stake it would seem wise to
follow carefully the structured course of action J.R. Clark
described above. March 1984
THE ECONOMIC
APPROACH
1 TRUE OR FALSE
Self-Test
1. People derive utility or satisfaction from consuming tangible goods and services like
food and clothing as well as from nontangibles like leisure, prestige, and freedom.
2. Economic goods are all those goods that are available in such supply that consumers
can obtain all they desire at a zero price.
3. Scarcity and poverty are really the same thing when you think about them in strictly
economic terms.
4. Scarcity comes about because resources are fixed, yet people's wants and needs are
unlimited.
5. When the benefits of undertaking a specific action increase or the costs of that action
decrease, economics tells us that individuals are more likely to undertake that action.
6. When an individual steals money from his or her employer, the primary effect might
be an increase in immediate income, but the secondary effect might well be the loss
of the person's job and a more permanent reduction in long-term earnings.
7. When you decide how to allocate your time among study, leisure, and working at a
job, you are not making an economic choice.
8. Extended government spending is "wrong" for the country. We should do what is
"right" and reduce government spending. These are examples of normative economic
statements.
9. The scientific method is used in economics to test the validity of positive economic
statements.
2 Multiple Choice
10. Public goods that are provided by government are not scarce, since you can use
things like highways and schools all that you want.
2 MULTIPLE CHOICE
Self-Test
1. Which of the following goods is not scarce and not an economic good?
a. television comedy c. economics textbooks
b. automobiles d. smallpox
2. If I can stand up during an exciting play at a football game, I can see better. Therefore,
if everyone stands up during the play, it is obvious that they can all see better. This
is an example of
a. the comedy of errors. c. the law of scarcity.
b. the fallacy of composition. d. the types of mistakes made by trained
economists.
3. Which of the following is a normative economic statement?
a. Gasoline costs $1.45 per gallon. c. There is too much oil being produced this
b. There are 100,000 more barrels of oil per year.
day being produced this year than at the d. It takes approximately 12 days for an oil
same time last year. tanker to cross the Atlantic.
4. Economic incentives affect the behavior of
a. only selfish and greedy people. c. selfish and altruistic people.
b. altruistic people. d. all human beings.
5. The test of an economic theory is its
a. ability to explain behavior. c. degree of sophistication.
b. ability to predict human behavior. d. simplicity.
6. Some examples of incentives to which people respond are
a. large fines for littering the highways. c. reduced prices for matinee performances
b. tax credits for investing in municipal bonds. of films and theatrical events.
d. all of the above.
7. Economic resources are
a. anything that is used to make a profit. c. anything that can be used to satisfy a want
b. anything that is used to incur an economic or need.
loss. d. none of the above.
8. The United States is producing over $1 trillion worth of goods and services each
year. Obviously there is no scarcity in the United States. This statement is
a. basically true because we have very little c. sometimes true when output is high in the
poverty. United States.
b. basically untrue because scarcity will al- d. never true because taxes are so high in the
ways exist among human beings. United States.
9. Which of the following is the best example of economizing behavior on the part of
the student whose only objective is to get an A in the course?
The Economic Approach 3
a. taking the optional final exam to improve c. doing outside reading in economics that
his grade even though he is already certain will not be beneficial for the examination,
of an A. d. spending time attending class and studying
b. spending the economics class hour study- after the teacher has informed him that his
ing for another class becuase he is already present grade of B cannot possibly change,
assured of getting an A.
10. The central message of Adam Smith was that the production and wealth of a nation
would be magnified if
a. individuals were left free to act in their own c. most goods were provided free by
interest. government.
b. the government controlled the use of and d. people were really more altrustic and
payment for labor and capital. looked after each others welfare as if it
were their own.
3 VOCABULARY
Self-Test
1. is a basic economic concept that indicates that less of a good is readily
available than consumers would like.
2. The desire for , which are scarce goods, exceeds the amount available from
nature.
3. is the selection from among alternatives.
4. An input such as land, labor, or capital used to produce economic goods is a .
5. is the ability to choose objectively the option that will yield a specific
benefit at the smallest cost possible, and conversely, to choose from among alterna
tives of equal cost the one that will produce the greatest benefit.
6. The satisfaction expected from a chosen course of action is
7. is the term used to describe the effects of a small change, usually one unit,
in economic activity.
8. are the economic consequences of an initial economic change that are not
immediately identifiable and are felt only with the passage of time.
9. comprises two steps: development of a theory and testing of that theory to
determine its consistency with real-world events.
10. A scientific attempt to determine "what is " among economic relationships is com
monly termed
11. involves judgment about "what ought to be" in economic matters; such
views cannot be proven false because they are based on value judgments.
12. The view that what is true for the individual will also be true for the entire group
constitutes the
4 Challenge Questions
4 CHALLENGE QUESTIONS
Self-Test
1. Which of the following is not scarce and not an economic "good"?
a. sailing c. diphtheria (an infectious throat disease)
b. air to breathe over major cities and urban d. public elementary education
developments
2. Which of the following is inconsistent with the basic principle of economics of
choice—based on cost?
a. A politician votes against a bill because c. People drive less as gas prices rise.
most of her constituents oppose it. d. A student, assured of an A grade in math-
b. More students attend lectures in an intro- ematics, attends extra-credit classes at no
ductory economics class because attend- extra benefit to herself.
ance counts 20 percent of the grade
(compared to 0 percent).
3. Which of the following best illustrates the "fallacy of composition"?
a. High automobile prices cause people to c. If the price of cigarettes rose, consumers
buy fewer automobiles. An increase in in would buy less; if consumers bought less,
come might persuade them to buy more, the price of cigarettes would rise.
creating a much heavier demand than ever d. All of the above are examples that clearly
before, thus reducing prices. illustrate the "fallacy of composition."
b. If a bean grower has a bumper harvest, he
will be much better off. If other bean grow
ers have the same good harvest, then they
will all be much better off.
4. (I) A reasonable price for a loaf of bread is what the average individual can afford.
(II) A high tax on gasoline will induce people to drive less.
Statements I and II relate to which of the following:
a. I is a positive economic statement, and II c. Both I and II are positive economic
is a normative economic statement. statements.
b. I is a normative economic statement, and d. Both I and II are normative economic
II is a positive economic statement. statements.
5. Economic analysis assumes that
a. people are individuals, therefore it is dif c. all individuals' choices are influenced by
ficult to predict their actions and reactions. their perception of costs and benefits.
b. individuals are basically selfish, and there d. People are basically humanitarian. It is this
fore their actions can be predicted with quality that makes it impossible to predict
certainty from this viewpoint. how they will react in many situations.
6. The test of an economic theory is
a. its ability to predict behavior. c. its ability to endure, even though it is
b. its ability to explain behavior. non verifiable.
d. its complexity, which shows that all factors
have been taken into account, and there
fore its predictions will be accurate.
The Economic Approach 5
7. Statements I and II relate to the responsiveness of people to various motives:
(I) An increase in the benefits of an action will increase costs, and thus make it unlikely
that the action will be undertaken.
(II) A reduction in the costs of an activity will then reduce the likelihood that the
action will be undertaken.
a. Only statement I is correct. c. Neither statements are correct.
b. Only statement II is correct. d. Both statements are correct.
8. "The United States is one of the richest countries in the world, whereas Chad is one
of the poorest." Which of the following is most true?
a. There is scarcity in Chad, but none in the c. Goods are scarce both in America and in
United States. Chad. Poverty is different from scarcity.
b. Poverty means that goods are scarce for the d. None of the above,
poor, but not for the rich.
9. According to Adam Smith, individual self-interest
a. could lead to a negative influence on eco- c. could be a useful force if harnessed by gov-
nomic progress if not checked by ernments and channelled in the right
government. direction.
b. is a major factor in retarding economic d. would be a powerful force for economic
progress. progress if individuals were left free to pur
sue their own interest.
10. When an individual displays economizing behavior, it means that he or she
a. always chooses the least expensive product, c. chooses goods so as to gain a certain benefit
regardless of other advantages and for as small a cost as possible,
disadvantages. d. walks to school to save wear and tear on his
b. cuts down on expenses in order to save as or her automobile, even though he or she
much as possible. dislikes walking.
5 PROBLEMS AND PROJECTS
1. List seven guidelines that are important to the economic way of thinking. Explain in
your own words the meaning of each guideline, giving examples when they are
appropriate.
2. Exhibit 1 shows the relationship between gas consumption of a new Chevrolet and
the number of miles traveled.
Exhibit 1
Total distance traveled Amount of gasoline consumed
(miles) (gallons)
0 0
75 5
150 10
225 15
300 20
375 25
450 30
