Chapter 1: Limit, Alternatives, and Choices

Question 1

What is opportunity cost?

Answer 1

The value of the best alternative forgone due to an action taken

Question 2

What is purposeful behavior in terms of economics?

Answer 2

Economists assume that people are rational, weighing costs and benefits of alternatives

Question 3

What is scarcity and choices in terms of economics?

Answer 3

If there were no scarcity, there would be no need to economize and therefore no need to make choices

Question 4

What is marginal analysis?

Answer 4

• Marginal means extra

- We will choose to do something if the marginal benefit is greater than the marginal cost

Question 5

What are economic theories?

Answer 5

Statements about economic behavior or the economy that enable prediction of the likely effects of certain actions

Question 6

What does ceteris paribus mean?

Answer 6

“All other variables constant”… necessary assumption for isolating the effect of one variable on the other variable

Question 7

What does microeconomics focus on?

Answer 7

Decision making by individuals

Question 8

What does macro economics focus on?

Answer 8

The economy as a whole or its basic subdivisions

Question 9

What is a budget line?

Answer 9

A schedule showing combinations of the two goods the individual can afford

Question 10

What does the downward slope of the budget line mean?

Answer 10

It reflects the fact that we have limited income and trade-offs among goods are needed (CONSTRAINT)

Question 11

2 Reasons for a budget line shift?

Answer 11

1) income doubles

2) both prices have dropped by 50%

Question 12

2 Reasons for a budget line pivot:

Answer 12

1) price of DVDs has dropped by 50%

2) both income and price of books have doubled

Question 13

What does the slope of the budget line indicate?

Answer 13

The trade off when purchasing items

Question 14

4 factors of production (or input)

Answer 14

land, labor, capital, entrepreneurial ability

Question 15

What is the Production Possibilities Curve (PPC)?

Answer 15

Shows the combinations of two goods that can be produced with a given set of resources and technology

Question 16

What does the downward sloping production possibilities curve indicate?

Answer 16

Constraint, society has limited resources

Question 17

What do the points on the PPC mean?

Answer 17

Attainable production as long as the economy uses all its available resources

Question 18

What do the points inside the PPC mean?

Answer 18

Attainable bu inefficient production because they reflect less total output than points on the PPC

Question 19

What does the slope of the PPC tell us?

Answer 19

It measures the opportunity cost of producing once more unit of the good on the horizontal axis (rate of tradeoff)

Question 20

Why is there a law of increasing opportunity cost?

Answer 20

Because economic resources are not completely adaptable to alternative uses and hence different opportunity costs are involved in their employment

Question 21

What is another name of the law of increasing opportunity cost?

Answer 21

The low hanging fruit principle

Question 22

What two pieces of information do economic decisions center on?

Answer 22

Comparison of marginal benefits and marginal costs

Question 23

Whet should economic activity expand? (in terms of MB and MC)

Answer 23

As long as MB > MC

Question 24

When should economic activity be reduced?

Answer 24

If MC > MB

Question 25

Where does the optimal amount of activity occur on the PPC?

Answer 25

Where MB = MC

Question 26

What effect does unemployment have on the PPC?

Answer 26

Producing within the curve….underutilizing resources

Question 27

3 Instances of economic growth (indicted by outward shift of PPC)

Answer 27

1) increases in the quantity of available resources
2) increases in the quality of available resources
3) advances in technology