Unit 1 Basic Concepts

Question 1

Scarcity

Answer 1

Scarcity is when unlimited wants meet limited resources.

Question 2

Economics

Answer 2

Economics is the study of how people make choices to satisfy wants given limited resources.

Question 3

Positive vs. Normative Economics

Answer 3

Positive = fact-based. Normative = opinion-based and judgment-based.

Question 4

Opportunity Cost

Answer 4

Opportunity cost is the value of the next-best alternative that is given up.

Question 5

Trade-Offs

Answer 5

Trade-offs are all alternatives that must be given up when a choice is made.

Question 6

Marginal Analysis

Answer 6

Marginal analysis compares the additional benefits and additional costs of a decision.

Question 7

Marginal Benefit

Answer 7

Marginal benefit is the additional satisfaction from consuming one more unit of a good.

Question 8

Factors of Production

Answer 8

The four factors are land, labor, capital, and entrepreneurship.

Question 8

Marginal Cost

Answer 8

Marginal cost is the additional cost from producing or consuming one more unit of a good.

Question 9

Incentives

Answer 9

Incentives are rewards or punishments that encourage or discourage behavior.

Question 10

Land (Factor of Production)

Answer 10

Land includes all natural resources used to produce goods and services.

Question 11

Labor (Factor of Production)

Answer 11

Labor is the human effort used in producing goods and services.

Question 12

Physical Capital

Answer 12

Physical capital is human-made goods used to produce other goods and services.

Question 13

Human Capital

Answer 13

Human capital is the knowledge and skills gained through education and experience.

Question 14

Entrepreneurship

Answer 14

Entrepreneurship organizes resources, takes risks, and creates goods and services.

Question 15

Utility

Answer 15

Utility is the satisfaction or pleasure received from consuming a good or service.

Question 16

Law of Diminishing Marginal Utility

Answer 16

As consumption of a good increases, the additional satisfaction gained from each additional unit eventually decreases.

Question 17

Economic Systems

Answer 17

Economic systems answer what to produce, how to produce, and for whom to produce.

Question 17

Command Economy

Answer 17

In a command economy, the government owns resources and makes all economic decisions.

Question 18

Market Economy

Answer 18

In a market economy, decisions are made by individuals based on supply and demand.

Question 19

Mixed Economy

Answer 19

A mixed economy blends free market principles with government intervention.

Question 20

Free Market Advantages

Answer 20

Markets create efficiency, incentives for innovation, and consumer choice.

Question 21

Command Economy Disadvantages

Answer 21

Command economies often have inefficiency, lack of incentives, and shortages or surpluses.

Question 22

Factor Market

Answer 22

In the factor market, households sell resources and firms buy resources.

Question 22

Production Possibilities Curve (PPC)

Answer 22

The PPC shows the maximum possible output combinations of two goods given resources and technology.

Question 22

Product Market

Answer 22

In the product market, firms sell goods and services and households buy them.

Question 22

Efficient Points (PPC)

Answer 22

Points on the PPC represent full and efficient use of resources.

Question 23

Opportunity Cost on the PPC

Answer 23

The opportunity cost of producing more of one good is the amount of the other good that must be given up.

Question 24

Inefficient Points (PPC)

Answer 24

Points inside the PPC represent underutilization of resources.

Question 25

Unattainable Points (PPC)

Answer 25

Points outside the PPC are unattainable with current resources and technology.

Question 26

Bowed-Out PPC Shape

Answer 26

A bowed-out (concave) PPC shows increasing opportunity costs.

Question 27

Straight-Line PPC Shape

Answer 27

A straight-line PPC shows constant opportunity costs.

Question 28

Economic Growth (PPC Shift Outward)

Answer 28

Economic growth shifts the PPC outward due to more resources, better technology, or improvements in education.

Question 29

Specialization

Answer 29

Specialization is focusing production on a limited range of goods to increase efficiency.

Question 30

Comparative Advantage

Answer 30

Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer.

Question 31

Absolute Advantage

Answer 31

Absolute advantage is the ability to produce more output with the same resources.

Question 32

Terms of Trade

Answer 32

Terms of trade are mutually beneficial if the trading price is between the producers' opportunity costs.

Question 33

Marginal Analysis (General Rule) Equation

Answer 33

Keep doing an activity as long as MB ≥ MC. Stop at MB = MC

Question 34

Terms of Trade Range Equation

Answer 34

Producer's OC < Terms of Trade < Other Producer's OC. Price must be between both OC's

Question 35

Comparative Advantage Calculate

Answer 35

Whoever has lower OC has compatative advantage

Question 35

Absolute Advantage Calculate. Input and Output problems

Answer 35

In an output problem: whoever produces more has the absolute advantage. In an input problem: whoever uses fewer resources has the absolute advantage

Question 36

Opportunity Cost (Output Method) equation

Answer 36

OC Good A = Good B / Good A

Question 37

Opportunity Cost (Input Method) equation

Answer 37

OC Good A = Good A / Good B

Question 38

Output problem

Answer 38

How much goods are produced with fixed resources

Question 39

Input Problem

Answer 39

How much resources are needed for a unit of good

Question 40

Resource allocation

Answer 40

Deciding how to distribute scarce resources to different uses.

Question 41

Equity

Answer 41

Distributing resources fairly, though not always equally.

Question 42

Productive Efficiency

Answer 42

Producing goods and services at the lowest possible cost.

Question 43

Allocative Efficiency

Answer 43

P = MC Firms arent producing too much nor too little. What society wants

Question 44

Household

Answer 44

A person or group of people who demand goods and services and supply factors of production (like labor) to firms.

Question 45

Firm

Answer 45

A business organization that produces goods or services to sell for profit by using factors of production.