ECON TEST 1

Question 1

scarcity is…

Answer 1

• limitless wants, but limited resources
• a good is scarce if more of it CANNOT be produced

Question 2

differentiate scarcity and shortage

Answer 2

• scarcity: more cannot be produced
• shortage - temporary description of market. - people demand more than is supplied. ex. toilet paper during COVID, gas after hurricanes, etc. (is graphable)

Question 3

define opportunity costs.

Answer 3

the loss of potential gain from forgone alternatives when one alternative is chosen. (compares the return of chosen action against highest return of what else you could be doing)

Question 4

define trade-offs

Answer 4

to gain something is to accept less of another thing (compares all other alternatives)

Question 5

differentiate between opportunity cost and tradeoffs

Answer 5

trade off- compares all other alternatives
opp cost - compares the return of chosen action against highest return of what else you could be doing

Question 6

differentiate between needs and wants

Answer 6

need - item you need to survive
want - item you would like to have

Question 7

define economics

Answer 7

econ is the study of how people decide to divide scarce resources.

1. scarcity
2. how ppl use resources and respond to incentives
3. decision making
4. production, distribution, and consumption of goods and services.

Question 8

explain how consumers and producers handle the condition of scarcity by making choices that result in opportunity costs and tradeoffs.

Answer 8

• people are generally rational (ppl make their decisions for themselves based on which outcome maximizes benefit and minimizes cost)
• people respond to incentives (benefits or costs of an action that influence a behavior)

Question 9

what r the factors of production?

Answer 9

land, labor, capital, and entrepreneurship

Question 10

define land, labor, capital, and entrepreneurship

Answer 10

• land - any natural resource - ex. trees, cotton, oil
• labor - ppl who contribute to production - ex. workers
• capital - tools, machinery, buildings - ex. factory, tool, machines
• entrepreneurship - an entrepreneur brings together: land, labor, and capital together to produce good.

Question 11

define productivity.

Answer 11

the quantity of a good produced per input.

quantity of output/
quantity of input

ex. 6 surgeries/hour

Question 12

outline what effects research and development, equipment and tech, and the training of workers can have on productivity.

Answer 12

they can all increase productivity if effective idk

Question 13

describe factors that influence earnings of workers

Answer 13

credentials, experience and skill, industry or employer, job tasks, and geographic location

Question 14

explain voluntary exchange.

Answer 14

people trade good or services to gain excess

Question 15

illustrate that individuals engage in voluntary exchange because both parties are better off by doing so

Answer 15

when trade occurs:
cost of X good < benefit from using X good

when trade doesn’t occur:
cost of Y good > benefit from using Y good

Question 16

why money must be portable, divisible, accepted, limited in amount, durable, and uniform

Answer 16

• portable: carry with them, transferable to others
• divisible: to split into small values (non-divisible= gold ex)
• durable: can be used repeatedly
• desirable: limited in amount, avoids runaway inflation (non-limited = everywhere ex. grass)
• uniform: keeps all equal units valued the same, fakes become detectable (non-uniform = tree bark)
• accepted: firms and households recognize its value (non-accepted - colonial money in diff colonies)

Question 17

explain functions of money: medium of exchange, store of value, and unit of account

Answer 17

• an item accepted in exchange for goods and services

It’s a medium of exchange, has no intrinsic value (no value of its own), no representing any object of own (only measures other goods)

Question 18

list the three basic economic questions

Answer 18

• what to produce
• how to produce it
• for whom to produce it

Question 19

detail how market, command, and mixed economies answer the three basic economic questions. (what to produce, how to produce it, for whom to produce it)

Answer 19

market -
- buyers express preferences on what to buy and influence what is produced
- firms make goods and they try to produce things as cheap and efficiently in order to sell item for more than how much to make
- there is inequality of income and wealth (availability of good based on price)
*no gov intervention (laissez-faire)

command (planned) economy:
- gov decides goods and services for consumers to buy
- gov decides how to produce it
- gov decides who to produce it to

mixed economy:
- there is a mix of gov and market forces for all three questions - who gets to decide

Question 20

detail advantages and disadvantages of market, command, and mixed economies

Answer 20

market:
pros - businesses competes and prices generally decrease
con - owners might be extremely rich, everyone doesn’t consume

command:
pros - needs to be prioritized (less unemployment and coordinated gov)
cons - people might not get what they wanted

mixed:
pros - free markets and gov intervention
cons - concerns ab the sustainability and efficiency

Question 21

differentiate between constant costs and increasing costs on a PPC (Production Possibilities Curve)and explain shape of the curves.

Answer 21

constant opportunity costs:
- can be perfectly linear

increasing costs:
- can be increasing
curve shifters (+) = ex. more resources, education/training, technology (productivity), and immigration
curve shifters (-) = ex. loss of resources, natural disaster, death/loss of population, less education

A - efficient - anywhere on line
B - inefficient - under the curve
C - impossible - outside the curve
D - possible, but inefficient - same as B

*possible = anywhere on line or under

Question 22

explain that the function of profit is the incentive for taking on the risks of going into business.

Answer 22

higher risk = higher rewards, higher risk = less chance of positive return

could lead to more money?

Question 23

discuss the risk/reward relationship

Answer 23

higher risk = higher rewards
higher risk = less chance of positive return

Question 24

describe concepts of invisible hand, laissez-faire and specialization on labor

Answer 24

invisible hand - individual self-interest guide markets to efficiency (from Adam Smith)

laissez-faire - no interference of gov

specialization on labor - each worker should focus on one task (specialize)

Question 25

differentiate between proletariat and the bourgeoisie

Answer 25

owners = bourgeoisie
workers = proletariat

Question 26

principles of capitalism, communism, and socialism

Answer 26

capitalism - based on private ownership of the means of production and individual economic freedom. - most businesses are owned by private individuals and not by gov

communism - no private ownership of property should be allowed - property should be shared and ppl should not control gov

socialism - like communism, socialism believes that wealth and income should be shared more equally among ppl, do not believe that workers will overthrow capitalists violently - goal is to narrow gap between rich and poor

Question 27

economic theories w Classical (Adam Smith), Demand-Siders (John Maynard Keynes), the Austrian School (Friedrich Hayek, Supply-Siders (Arthur Laffer), and Monetarists (Milton Friedman)

Answer 27

• Adam Smith = ppl act in their own self-interest, idea is the invisible hand (self-interest guides markets to efficiency), each worker should focus on one task, countries benefit from trade

John Maynard Keynes = Great Depression was longer than necessary ( there was a lack of spending) ppl save when in fear, solution is to provide jobs, reduce taxes, spend A LOT
solution = gov stimulates economy during a downturn

Friedrich Hayek = unique value f good to individual, value decreases with each additional unit consumed (like the snow day ex) - Decreasing Marginal Returns

Arthur Laffer = supply side econ, tax revenue and tax rate are not linear, rich knows best, cut tax rate = raise tax revenue, goal is to grow economy, President Reagan influence, taxes have limited effect

Milton Friedman = money supply determines economic pos or neg, increase Money Supply = decrease interest rates, decrease Money Supply = increase interest rates