Unit 1

Question 1

Scarcity

Answer 1

Society has unlimited wants but limited resources

Question 2

Incentives / Disincentives

Answer 2

Rewards or punishments that motivate choices. We can use incentives/disincentives to alter human behavior.

Question 3

Opportunity Cost

Answer 3

The value of what you must give up in order to do something. The value of the next best alternative.

Question 4

Theory of Rational Self-Interest

Answer 4

The theory that human beings act in predictable ways. Humans will always act in their own self-interest.

Question 5

What does the PPF represent?

Answer 5

PPF = Production POssibilities Frontier = a model of the economey that measures trade-offs.
There are 4 key assumptions of the PPF:
1. Only 2 goods can be produced
2. Full employment of resources
3. Fixed resources (ceteris paribus)
4. Fixed technology

Question 6

Calculating opportunity cost from PPC:

Answer 6

Per Unit Cost = give up / gain

Question 7

Law of Increasing Opportunity Costs

Answer 7

As you produce more of any good, the opportunity cost will INCREASE because resources for producing both goods are NOT EQUALLY SUITED. As a result, the PPF is bowed out (concave to the origin / CD).

Question 8

Law of Constant Opportunity Costs

Answer 8

As you produce more of any good, the opportunity cost will REMAIN CONSTANT because resources for producing both goods are EQUALLY SUITED. As a result, the PPF is a straight line.

Question 9

Points on the PPF represent:

Answer 9

efficient use of all resources

Question 10

Points outside the PPF represent:

Answer 10

a production combination that is currently unattainable

Question 11

Points inside the PPF represent:

Answer 11

an inefficient use of resources

Question 12

Consumer goods:

Answer 12

Goods for direct consumption

Question 13

Capital Goods:

Answer 13

Goods used to produce consumer goods
-Human capital (knowledge + skills)
-Physical capital (machines, factories, tools, tech, etc.)

Question 14

Shifters of the PPF

Answer 14

1. Change in resources
2. Change in technology

Question 15

Where on the PPF should nations actively aim to be operating?

Answer 15

Slightly towards capital goods so they can produce more consumer goods in the future, expanding their economy.

Question 16

Absolute Advantage

Answer 16

The producer that can produce the most output with the same resources

Question 17

Comparative Advantage

Answer 17

The producer with the lowest opportunity cost; countries specialize in what they have comparative advantage in

Question 18

Calculating Opportunity Cost Cheat Code:

Answer 18

O.O.O.
Output. Other goes. Over.

Question 19

The Impact of Trade on a Nation

Answer 19

With specialization and trade countries are able to consume a bundle of goods that they are not able to produce themselves. They can also obtain many goods for less than if they had to produce them themselves.

Question 20

Input:

Answer 20

A resource used to produce a final good
- Examples of inputs: rubber is an input in tire production, leather is an input in shoe production
- Common examples: hours needed to produce one bike, acres needed to produce one bushel of corn

Question 21

Absolute Advantage Input

Answer 21

The producer that requires the least amount of input to produce the same good

Question 22

Calculating Opportunity Costs Cheat Code for Input

Answer 22

I.O.U.
Input. Other goes. Under.

Question 23

Demand

Answer 23

The different quantities of goods that consumers are willing and able to buy at different prices.

Question 24

Law of Demand

Answer 24

A higher price of a good leads people to a smaller quantity demanded of the good

Question 25

Difference between change in quantity demanded and change in demand:

Answer 25

Change in Qdemanded = mvmt on demand curve Change in D = shift of D

Question 26

Why is there an inverse relationship between price and quantity demanded? / Why is the Demand curve downward sloping?

Answer 26

1. Law of diminishing marginal utility 2. Substitution effect 3. Income effect

Question 27

Shifters of Demand (5)

Answer 27

TRIBE: 1. Tastes + Preferences 2. Related Goods 3. Income 4. Buyers (numbers of) 5. Expectations of Future

Question 28

Substitutes

Answer 28

Goods used in place of one another; if price of pepsi falls, the demand for coke will decrease

Question 29

Complements

Answer 29

Goods used together; if the price of peanut butter falls, the demand for jelly will increase

Question 30

Normal Goods

Answer 30

If income increases demand of these goods will increase; ex: sneakers, sea food, jewelery, homes

Question 31

Inferior Goods

Answer 31

If income decreases demand of these goods will increase; ex: Ramen noodles, used cars, store brands

Question 32

Supply

Answer 32

Different quantities of a good that sellers are willing and able to sell (produce) at different prices

Question 33

Law of Supply

Answer 33

A higher price of a good leads people to a larger quantity supplied of the good

Question 34

Shifters of Supply (5)

Answer 34

1. Intervention of the government 2. Resources 3. Expectations 4. Number of sellers 5. Technology

Question 35

What determines the equilibrium price?

Answer 35

All interactions between buyers and sellers; shortages and surpluses, force the price to a stable equilibrium.

Question 36

What is true at equilibrium?

Answer 36

Every willing buyer can find a willing seller.

Question 37

Why is equilibrium efficient?

Answer 37

It allows buyers and sellers to generally trade at a price that benefits them both.

Question 38

How does a market gradually find equilibrium price and quantity?

Answer 38

Through negotiation; All the interactions between buyers + sellers; shortages --> producers raise prices, surpluses --> producers lower prices

Question 39

Double Shift Rule

Answer 39

If 2 curves shift at the same time, either price or quantity will be indeterminate (ambiguous)