Chapter 2

Question 1

Sarcity

Answer 1

a situation in which the ingredients for producing things that people desire are insufficient to satisfy all wants at a zero price

exists because human wants always exceeds what can be produced

Question 2

Scarcity is not…

Scarcity is…

Answer 2

…not a shortage or poverty.

…is a fact of life - it has, does, and always will exist.

Question 3

Production

Answer 3

any activity that results in the conversion of resources into products that can be used in consumption

Question 4

5 Factors of Production

resources used

Answer 4

1. Land (Natural Resource) - includes all nonhuman gifts of nature, such as timber, fish, water, etc.
2. Labor (Human Resource) - productive contributions made by individuals who work
3. Physical Capital - all manufactured resources that are used for production. This includes buildings, equipment, machines, and improvements to land
4. Human Capital - accumulated training/education of workers
5. Entrepreneurship - human resource component that performs functions of raising capital, organizing, managing, and assembling other factors of production

Question 5

Goods

Answer 5

all things from which individuals derive satisfaction or happiness

includes everything from iPhones to the air we breathe

Question 6

Economic Goods

Answer 6

goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price

ex: cars, smartphones, etc

Question 7

Bads

Answer 7

goods for which the desired quantity is much less than what nature provides at a zero price

ex: weeds

Question 8

Services

Answer 8

mental or physical labor or assistance purchased by consumers

ex: assistance of physicians, lawyers, dentists, etc.

Question 9

Relationship between Wants and Needs:

Answer 9

wants =/= needs

typically, when people say they “need” something, they really just “want” it.

Ex: “I need new clothes”

• said by somebody dying of exposure to elements…NEED
• said by somebody who just wants a new shirt…WANT

Question 10

Opportunity Cost

Answer 10

the highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want

not all alternatives, just the next-best one

Question 11

In economics, cost is always a…

Answer 11

…forgone opportunity.

Question 12

Trade Offs

Answer 12

when somebody engages in any activity using any resource, they are trading off the use of that resource for one or more alternative uses

ex: Studying for economics class means trading off some time that would be spent studying for accounting class.

Question 13

Production Possibilities Curve (PPC)

Answer 13

a curve representing all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality

note: some can be straight-line

Question 14

PPC:

Production possibilities

Answer 14

any point on the line tells us the maximum quantity of one good or service that can be produced, given that a specific quantity of another is produced

Question 15

In a PPC, a point outside the curve is…

Answer 15

…impossible to reach

Question 16

In a PPC, a point inside the curve is…

Answer 16

…possible to reach, but indicates resources are not fully utilized. Also called “inefficient point”.

typically found during periods of high unemployment.

Question 17

4 Assumptions Made When a PPC is Constructed:

Answer 17

1. Resources are fully utilized
2. Production takes place over a specific time period
3. The resource inputs, in both quantity and quality, used to produce goods are fixed over this time period
4. Technology does not change over this time period

Question 18

Technology

Answer 18

the total pool of applied knowledge concerning how goods and services can be produced

think of this as the formula used to combine factors of production

Question 19

Efficiency

Answer 19

the case in which a given level of inputs is used to produce the maximum output possible

alternatively, the situation in which a given output is produced at minimum cost

Question 20

Inefficient Point

Answer 20

any point below the PPC, at which the use of resources is not generating the maximum possible output

Question 21

Law of Increasing Additional Cost

Answer 21

when people take more resources and apply them to the production of any specific good, the opportunity cost increases for each additional unit produced

Question 22

PPC:

In general, the more specialized the resources…

Answer 22

…the more bowed the PPC.

Question 23

PPC:

If resources are equally suitable for both productions…

Answer 23

…the more straight-lined the PPC.

Question 24

Economic Growth occurs because…

Answer 24

…increases in number of workers, productive investment in equipment, etc.

Question 25

Consumption

Answer 25

the use of goods and services for personal satisfaction

ex: food, clothes, etc.

Question 26

Why we make capital goods:

Answer 26

they enable us to produce larger quantities of consumer goods, or to make them less expensively than we otherwise could

ex: before fish are produced for the market, equipment like boats, nets, and poles are purchased first.

Question 27

Forgoing current consumption:

Answer 27

we’re waiting for a future time where we will consume the rewards which will be reaped from the use of our capital goods

Question 28

Trade-off between consumption goods and capital goods:

Answer 28

to have more consumer goods in the future, we must accept fewer consumer goods today

opportunity cost: more goods today = fewer goods tomorrow

Question 29

Specialization

Answer 29

the organization of economic activity so that what each person (or region) consumes is not identical to what that person (or region) produces

ex: an individual may specialize in law or medicine. A nation may specialize in the production of coffee.

Question 30

Comparative Advantage

Answer 30

the ability to produce a good or service at a lower opportunity cost, compared to other producers

this is always a relative concept

Question 31

Absolute Advantage

Answer 31

the ability to produce more units of a good or service, using a given quantity of labor or resource inputs

equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs

Question 32

Between absolute adv. and comparative adv., which one matters in determining how time is allocated?

Answer 32

Comparative Advantage

this is because it involves the high-valued alternative in a decision about time allocation

Question 33

Division of Labor

Answer 33

the segregation of resources into different specific tasks. Results in a higher level of efficiency

ex: one automobile worker puts on bumpers, another doors, and so on…