Unit 1

Question 1

Define economics.

Answer 1

The study of how people satisfy their needs and wants by making choices; we have scarce resources for unlimited wants and needs

Question 2

Explain what happens in the Factor Market.

Answer 2

• Firms purchase from households

- Households are the sellers

Question 3

Explain what happens in the Product Market.

Answer 3

• Households purchase the goods/services that firms produce

- Households are the buyers

Question 4

What is National Income and how is it determined? Hint: refer to the Factor Market

Answer 4

Sum of wages, rent and interest; total payments received by the factors of production

Question 5

What is Gross Domestic Product and how is it determined? Hint: refer to the Product Market

Answer 5

The total value of all final goods and services produced in an economy

Question 6

Who are the three participants in the Circular Flow Model?

Answer 6

Households, government & business

Question 7

In which market is the “What to produce?” question answered in a free enterprise system?

Answer 7

Product Market

Question 8

In which market is the “How to produce?” and “Who will consume it?” questions answered in a free
enterprise system?

Answer 8

Factor Market

Question 9

What are the payments for land, labor, and capital?

Answer 9

Rent, wages and interest

Question 10

Explain economic interdependence as it relates to the Circular Flow Model.

Answer 10

Consumers rely on business and vis versa

Question 11

Production frontier

Answer 11

Line showing maximum on a PPC

Question 12

Underutilization

Answer 12

Fewer resources than an economy is capable is using

Question 13

Growth-economy increases output through…

Answer 13

1. Increased resources

2. Technology

Question 14

Effects of technology and increased resources on the

Production Possibility Curve

Answer 14

PPC shifts to the right

Question 15

Cost of producing one product over another on a PPC graph

Answer 15

Opportunity cost

Question 16

What are the three economic questions every system must answer?

Answer 16

What good/services?
How goods/services should be produced?
Who consumes these goods/services?

Question 17

What are the different types of economic systems and the characteristics of each?

Answer 17

1. Traditional- Customs decide
2. Command-A lot of government decision
3. Market- Consumers decide based on exchange of sellers & buyers
4. Mixed- Combined free market with limited government

Question 18

How does government control in a mixed economy?

Answer 18

Responsible for regulation, contract enforcement and consumer protection

Question 19

Provide examples (countries) for each of the different economic systems.

Answer 19

Command-North Korea, Cuba
Market-US
Traditional- Britain

Question 20

Describe Adam Smith’s Invisible Hand and how these concepts contribute to our economic concept of
capitalism.

Answer 20

• Self regulating nature of the market place

- Competition controls, regulate economy, profit, and private property motivate free people within the economy

Question 21

Explain the concept of laissez faire according to Adam Smith’s Invisible Hand.

Answer 21

Laissez Faire- Doctrine that states government shouldn’t intervene in the market place

Question 22

What are the three primary goals of a capitalist economic system?

Answer 22

1. Economic growth
2. Price stability
3. Unemployment

Question 23

How are economic growth, price stability, and unemployment measured?

Answer 23

Percentages of unemployment, inflation and GDP

Question 24

Define and describe the three factors of production.

Answer 24

Land-Natural resources (rent)
Labor-people who are employed to work (wages)
Capital- human & physical (interest)

Question 25

Define an entrepreneur.

Answer 25

Ambitious leader who combine land labor and capital to create new market and goods

Question 26

Explain the difference between scarcity and shortage

Answer 26

Scarcity- Limited resources for unlimited wants | Shortage- Unavailable; Quantity demanded is greater than supplied

Question 27

Explain the concepts of opportunity cost and trade-offs.

Answer 27

Trade offs- all alternatives lost when making decision | Opportunity cost- The most desirable alternative

Question 28

Define the economic term "Guns and Butter."

Answer 28

Guns- Defense/military | Butter-Consumer goods

Question 29

Explain the concepts of comparative advantage and absolute advantage.

Answer 29

Comparative- lowest opportunity cost | absolute- Can produce the most

Question 30

Describe the process of finding the opportunity costs for a country producing two products.

Answer 30

Total Butter - Butter at point A = Oppritunity cost of butter

Question 31

Define the importance of specialization for trade.

Answer 31

Key to trade

Question 32

What is the difference between trade deficit and trade surplus?

Answer 32

Deficit- imports more than exports | Surplus- exports more than imports

Question 33

List and define the different types of trade restrictions (trade barriers).

Answer 33

Quota- Limit the amount Embargo- Ban on imports/exports Tariff- tax

Question 34

What is the Current Account and what does it indicate about a country’s trade?

Answer 34

Value of imports and exports

Question 35

Describe how foreign exchange of currency and exchange rates affect trade.

Answer 35

When US dollar appreciates in value, less goods will be sold

Question 36

Explain how the exchange rates affect the value of the dollar and demand for U.S. products.

Answer 36

Appreciation- value increases | Depreciation- value decreases

Question 37

What are the pros and cons for "Protectionism and Free Trade" advocates?

Answer 37

Protectionism-concerned with job protection | pros-protect domestic jobs, infant industries, national security

Question 38

What is NAFTA is, who does it involve, and what does it do?

Answer 38

NAFTA-north american free trade agreement | -eliminates all tariffs and other trade barriers between Canada, mexico and US

Question 39

Explain the major trading blocs (free trade zones) in the world.

Answer 39

- NAFTA- north america - EU- european union - APEC- Asia pacific - MERCOSUR- Brazil, argentina, paraguay and uraguay

Question 40

Define Infant Industry

Answer 40

Industry just developing

Question 41

Who are the Asian Tigers and why are they important?

Answer 41

1. Hong Kong 2. S. Korea 3. Singapore 4. Taiwan Have created double digit growth by -focusing exports on highly industrialized countries -high tariffs -education -land reform

Question 42

Human Capital

Answer 42

The knowledge and skills a worker gains through education and experience

Question 43

Physical Capital

Answer 43

Human made objects used to create other goods and services (Shoe factory and all the machines for making shoes)