Unit one

Question 1

Scarcity

Answer 1

the condition of having limited resources but unlimited wants.

Question 2

Microeconomics

Answer 2

the study of a particular piece of the economy (like a single household, business, industry, etc.)

Question 3

Macroeconomics

Answer 3

the study of the economy as a whole.

Question 4

TINSTAAFL

Answer 4

stands for “there is no such thing as a free lunch.” Most things in life are not free because resources had to be used to make those things. Once resources are used to make something, they cannot be used to make something else.

Question 5

Trade-offs

Answer 5

are ALL the alternatives a person gives up when he makes a choice.

Question 6

Opportunity cost

Answer 6

the next best thing that is given up is when you make a choice (the best trade-off).

Question 7

Three Basic Questions of Economics:

Answer 7

What to produce?

How to produce?

For whom to produce?

Question 8

Factors of productions/ productive resources/Inputs

Answer 8

the resources needed to make a product or provide a service.

Question 9

four categories of resources that make up the factors of production:

Answer 9

◦Land

◦Labor

◦Capital

◦Entrepreneurs

Question 10

Land

Answer 10

all-natural resources not made by human hands.

Question 11

Capital

Answer 11

the man-made tools, equipment, and factories used in the production of a good or service.

Question 12

Labor

Answer 12

people and their efforts, abilities, and skills.

Question 13

entrepreneur

Answer 13

a risk-taker in search of profit; he gets his own category because he creates new ideas, products, and businesses.

Question 14

Output

Answer 14

the term for the finished products or services

Question 15

consumer good

Answer 15

a final good that is meant for use by a consumer.

Question 16

capital good

Answer 16

a final good that is used by a business to make another final good.

Question 17

conspicuous consumption

Answer 17

the use of a good or service to impress someone.

Question 18

Human capital

Answer 18

the abilities, talents, etc. of a person that make them economically useful. The human capital you possess is the biggest determinant of your pay as a worker. The more human capital you possess and the rarer that human capital, the more you will get paid.

Question 19

Paradox of value

Answer 19

explains why some needs are cheap and some wants are expensive. explains that the scarcity of an item affects its value. Because diamonds are rare and freshwater is not.

Question 20

Efficiency requires ______ and ________.

Answer 20

Full employment and full production

Question 21

Full employment

Answer 21

means that all available resources are being used.

Question 22

Full production

Answer 22

means that the resources being used are providing the most satisfaction of our economic wants as possible. (In other words, we’re getting as much out of the resources as possible).

Question 23

Inefficiency

Answer 23

means that resources are being wasted.

Question 24

Division of labor

Answer 24

is when a large task is broken down into smaller tasks and a worker is assigned to each small task. An assembly line is a good example.

Question 25

Specialization of labor

Answer 25

is more purposeful. It’s when a worker does the task at which he is best. For example, a doctor does not fix your car and a mechanic does not operate on you. Each does what he is trained to do (“best at”).

Question 26

Production possibilities curve (PPC)/frontier (PPF)

Answer 26

is a graph representing the various combinations of goods/services an economy can produce when all resources are being used to the best of our abilities.

Question 27

good

Answer 27

a product that is meant to be bought and sold.

Question 28

service

Answer 28

is work that is done for someone, usually in exchange for money.

Question 29

circular flow model

Answer 29

is used to show how money, goods/services, and resources are exchanged between producers and consumers.

Question 30

The circular flow has three main players:

Answer 30

Businesses – producers; those who make goods and services Households – consumers; those who use goods and services Government

Question 31

The circular flow has two markets:

Answer 31

1. The factor (or resource) market – this is where the factors of production (resources) are bought and sold (land, labor, capital, and entrepreneurial skills). 2. The product market – this is where finished goods and services are bought and sold (things like TVs, plumbing services, cars, etc.)

Question 32

businesses

Answer 32

producers; those who make goods and services

Question 33

Households

Answer 33

consumers; those who use goods and services

Question 34

In the factor market......

Answer 34

households sell resources and businesses buy resources

Question 35

In the produce market.....

Answer 35

households buy goods/services and businesses sell goods/services.

Question 36

The circular flow has two main “flows”:

Answer 36

1. the money flow | 2. the physical flow

Question 37

the money flow

Answer 37

hat shows the movement of payments. It should flow in one direction and make a full circle either on the inner loop or the outer loop.

Question 38

the physical flow

Answer 38

that shows the movement of resources and goods/services. It should flow in the opposite direction of the money flow and on the opposite loop.

Question 39

economic system/ economy

Answer 39

an organized way of providing for the needs and wants of a group of people.

Question 40

3 main types of economic system/ economy:

Answer 40

Traditional Market (Capitalism) Command (Communism)

Question 41

public goods

Answer 41

goods provided by the government to be collectively consumed.

Question 42

private goods

Answer 42

goods provided by a business to an individual.

Question 43

economic equity

Answer 43

fairness.

Question 44

economic equality

Answer 44

having an equal outcome.

Question 45

traditional economy

Answer 45

is one where the three basic questions of economics are decided by tradition, custom, ritual, and habit. What to produce? – The group decides what it needs (usually the basic necessities). How to produce? – The way it has always been done. For whom to produce? – The group as a whole. Traditional economies have some basic characteristics: ◦Based on tradition (obviously). ◦Centered around the family or community. ◦Tend to be very small. ◦Few advances or changes

Question 46

Advantages of traditional economies:

Answer 46

All community members are expected to contribute. All community members share in the group’s resources. One’s role is well-defined – no uncertainty about one’s job, place, etc. exists. 2) Stable, predictable, and continuous. Everyone knows what to expect because tradition does not change. For example, if your father was a farmer, then you can expect to be a farmer when you are older. None of this is in question or subject to dispute.

Question 47

Disadvantages of traditional economies:

Answer 47

1) Discourages new ideas and new ways of doing things: Must conform to the group’s wishes. Decisions are often made for individuals (no personal freedom). Because these groups are struggling just to find adequate food, etc., any unsuccessful attempt to try something new could be disastrous for the group. For example, a new hunting method that doesn’t work could mean starvation for the group. 2) Stagnation and lack of progress New ideas are often shunned or seen as an attack on tradition. Because of this, progress is very limited. 3) Lower standard of living Because they do not seek new and better ways of doing things, those who live in a traditional economy tend to live hard lives where the main focus is survival (so luxuries and other things that make life comfortable are rarities).

Question 48

market economy (capitalism)

Answer 48

is one in which private citizens own the factors of production. In other words, most things in the economy are owned by individuals, not the government. A market economy is also known as a free enterprise economy.

Question 49

A market economy is great at meeting the goals of

Answer 49

economic freedom and economic efficiency.

Question 50

Characteristics of capitalism:

Answer 50

``` Personal and economic freedom. Highly efficient Decentralized decision making Laissez-faire. Low taxes ```

Question 51

Laissez-faire.

Answer 51

It is the idea that government should stay out of the economy (and other aspects of people’s lives).

Question 52

Voluntary exchange

Answer 52

is the idea that buyers and sellers willingly engage in market transactions.

Question 53

Private property

Answer 53

means that people have the right to personal possessions that they can use as they wish.

Question 54

Profit motive

Answer 54

is the incentive that makes a person do something.

Question 55

Competition

Answer 55

is the struggle amongst sellers to attract customers.

Question 56

Consumer sovereignty

Answer 56

is the idea that consumers “rule” the market.

Question 57

Advantages of a market economy

Answer 57

``` Change happens gradually. Lots of freedom. Little government interference. Decentralized decision making Large variety of goods/services. Lots of consumer satisfaction. ```

Question 58

Disadvantages of a market economy:

Answer 58

Rewards only those who are productive. (Workers and businesses face uncertainty as a result of competition and change.) Does not produce a lot of public goods. Must guard against market failures.

Question 59

command economy (communism)

Answer 59

is one in which the government owns the factors of production.

Question 60

A command economy puts great emphasis on

Answer 60

equal distribution of wealth and economic security.

Question 61

Characteristics of communism:

Answer 61

``` Equal distribution of wealth A central planning authority Large bureaucracy Individual decisions are strictly forbidden. Risk-taking is forbidden Extremely high taxes No private property No rights of inheritance ```

Question 62

bureaucracy

Answer 62

is a large, messy, complex system.

Question 63

Advantages of a command economy:

Answer 63

Capable of dramatic change in a short time | Public services are available at little or no cost to the individuals

Question 64

Disadvantages of a command economy:

Answer 64

Does not meet the wants of consumers. No incentives to get people to work. The large bureaucracy wastes resources. (Has little flexibility to deal with small, day-to-day changes.) (New and different ideas are discouraged; no room for individuality.)

Question 65

Socialism

Answer 65

is an economic system in which the government owns MOST of the resources

Question 66

A mixed economy

Answer 66

is one that has characteristics of more than one economic system (traditional, market, and/or command).

Question 67

a free enterprise economy is another name for a market economy.

Answer 67

Because the U.S. is not a purely market/capitalist economy, it is sometimes called a modified free enterprise economy.