Chapter 1: Fundamentals

Question 1

What is economics?

Answer 1

about people and the choices they make in a world of scarcity/scarce resources; how those choices influence the world around us

Question 2

Microeconomics

Answer 2

study of the economy at small-scale such as individuals, households, and specific markets (i.e. the market of gasoline)

Question 3

Macroeconomics

Answer 3

study of the economy at large-scale, examining total output, the price level, and other aggregate measures (i.e. unemployment; how it affects the entire economy)

Question 4

Resources

Answer 4

foundation of all productive activity; any item used to produce goods and services (gift of nature, result or production, result of human effort)

Question 5

Types of resources

Answer 5

land, labor, capital, entrepreneurial ability

Question 6

scarcity

Answer 6

a condition that results from the inability of limited resources to satisfy unlimited wants

Question 7

opportunity cost

Answer 7

value of the next-best forgone alternative; value of opportunity that you gave up when you chose one activity/opportunity over another (slope of PPF)

Question 8

Assumptions for rational decision-making

Answer 8

1. self-interest 2. marginal decision making 3. optimization

Question 9

rational decision-making

Answer 9

the process of maximizing well-being; results from the comparison of marginal benefit and marginal cost

Question 10

decision rule

Answer 10

Benefits outweigh or equal costs then do it/more! Don’t do it/more in the reverse.

Question 11

marginal benefit (MB)

Answer 11

the additional benefit associated with one more unit of an activity; MB=Change in total Benefit (TB) / Change in quantity (Q)

Question 12

marginal costs (MC)

Answer 12

the additional costs associated with one more unit of an activity; MC=Change in total cost (TC) / Change in quantity (Q)

Question 13

production possibilities frontier

Answer 13

a graph that shows the possible combinations of two different goods and services that can be produced with fixed resources and technology (shows what is attainable and efficient)

Question 14

terms of trade

Answer 14

the price of one good, service, or resource in terms of another (if price between both parties opportunity cost, then both will benefit)

Question 15

gains from trade

Answer 15

the benefit or wealth that accrues to a buyer or seller as a result of a trade (does NOT have to be monetary)

Question 16

law of increasing opportunity costs

Answer 16

principle saying that because some resources are better suited to producing one good/service than another, as the production of a good/service increased, the opportunity cost of each additional unit rises.

Question 17

circular flow model

Answer 17

shows how goods, services, resources and money flow back and forth in an economy [resource market & product market]

Question 18

optimization

Answer 18

engaging in an activity as long as the marginal benefit is greater than or equal to its marginal cost [MB>= MC, do it]

Question 19

decreasing marginal benefit

Answer 19

the more a good or service is consumed in a given time period, the lower the marginal benefit associated with each additional item

Question 20

increasing marginal cost

Answer 20

the additional cost associated with each additional unit of an activity increases

Question 21

marginal value

Answer 21

change in total value divided by the change in quantity

Question 22

optimal level of output

Answer 22

the level of output at which the marginal benefit of the last unit produced and consumed is equal to the marginal cost of that unit (MB=MC)

Question 23

production possibility schedule

Answer 23

a table that shows the possible combinations of two different goods or services that can be produced with fixed resources

Question 24

constant opportunity costs

Answer 24

a characteristic of production whereby the opportunity costs associated with increasing or decreasing the production of one good or service in terms of another is constant at every level of production

Question 25

efficient allocation of resources

Answer 25

allocation of resources so that it is possible to increase production of one good only by decreasing the production of another

Question 26

inefficient allocation of resources

Answer 26

allocation of resources so that it is possible to increase production of one good without decreasing the production of another

Question 27

efficient allocation of resources

Answer 27

allocation of resources so that it is possible to increase production of one good ONLY BE DECREASING the production of another

Question 28

inefficient allocation of resources

Answer 28

allocation of resources so that it is possible to increase production of one good WITHOUT DECREASING the production of another

Question 29

comparative advantage

Answer 29

the ability to produce a good or service at a lower relative opportunity cost than that of another producer

Question 30

specialization

Answer 30

the result of low-cost producers focusing all of their efforts on producing a single good or service

Question 31

comparative advantage

Answer 31

the ability to produce a good or service at a lower relative opportunity cost than that of another producer; lower opportunity cost

Question 32

specialization

Answer 32

the result of low-cost producers focusing all of their efforts on producing a single good or service based on a comparative advantage

Question 33

slope (opportunity cost)

Answer 33

m=Rise (Y)/Run (X)

Question 34

other names for resources

Answer 34

1. inputs 2. factors of production