Chapter 1 - Basic Economics Concepts

Question 1

5 key elements of a market economy

Answer 1

Freely determined prices
Property rights and incentives
Freedom to trade
Role for government (defense and protection)
Role of private organizations

Question 2

What roles do prices play in a market economy?

Answer 2

1- Prices serve as signals about what should be produced and consumed

2- Prices provide incentives to people to alter their production or consumption

3- Prices affect the distribution of income, (or who gets what in the economy).

Question 3

Financial Crises

Answer 3

Disruptions to financial markets which make it difficult for people and business firms to borrow and obtain loans

Question 4

Recession

Answer 4

A decline in production and employment that lasts for six months or more

Question 5

The 3 fundamental questions of a society

Answer 5

What to produce?
How to produce it?
For whom to produce?

Question 6

Opportunity Cost

Answer 6

The value of the next-best foregone alternative that was not chosen because something else was chosen

Question 7

Gains from trade

Answer 7

Improvements in income, production or satisfaction owing to the exchange of goods and services

Question 8

Specialization

Answer 8

A concentration of production effort on a single specific task

Question 9

Division of labor

Answer 9

The division of production into various parts in which different groups of workers specialize

Question 10

Comparative advantage

Answer 10

A situation in which a person or group can produce a good or service at a lower opportunity cost than another person or group

Question 11

International trade

Answer 11

The exchange of goods and services between people or firms in different nations

Question 12

For every choice that has been made, there is also an __________________ of not doing one thing because another thing has been chosen

Answer 12

opportunity cost

Question 13

Gains from trade occur because trade permits ______________ through the _______________

Answer 13

specialization; division of labor

Question 14

Production possibilities

Answer 14

Alternative combinations of production of various goods that are possible, given the economy’s resources

Question 15

Increasing opportunity costs

Answer 15

A situation in which producing more of one good requires giving up an increasing amount of production of another good.`

Question 16

Production possibilities curve

Answer 16

A curve showing the maximum combinations of production of two goods that are possible, given the economy’s resources.

Question 17

Market Economy

Answer 17

An economy characterized by freely determined prices and the free exchange of goods and services in markets.

Question 18

Command Economy

Answer 18

An economy in which the government determines prices and production. (aka a “centrally planned economy”

Question 19

Market failure

Answer 19

Any situation in which the market does not lead to an efficient economic outcome and in which the government has a potential role

Question 20

Government failure

Answer 20

A situation in which the government fails to improve on the market or even makes things worse.

Question 21

Economic production is _________ if the economy is on the production possibilities curve.

Answer 21

efficient

Question 22

Production is _______________ if the economy is inside the production possibilities curve

Answer 22

inefficient

Question 23

Points outside the production possibilities curve are ____________ .

Answer 23

impossible

Question 24

How can financial crises cause inefficiencies?

Answer 24

An inability to obtain loans causes people and firms to reduce their purchases of goods and services. As a result, producers cut production