Chapter 2

Question 1

Choices about which goods to buy often occur because of _____.

Answer 1

Scarcity.

Question 2

True or False

Scarcity is often considered the most basic concept in all of economics.

Answer 2

True

Question 3

Define “Scarcity.”

Answer 3

The situation in which the ingredients for producing all the things that people desire are insufficient to satisfy all wants, at a zero price.

Question 4

Why does scarcity exist?

Answer 4

Because there are never enough resources or time to produce enough goods, at zero price, to satisfy every human want/desire.

Question 5

True or False

Scarcity is not equivalent to a shortage.

Answer 5

True

Question 6

True or False

Income levels are proportional to scarcity experienced by an individual.

Answer 6

False. Low-income levels do not create more scarcity, just as high-income levels do not alleviate scarcity.

Question 7

Define “Production.”

Answer 7

Any activity that results in the conversion of resources into products that can be used in consumption.

Question 8

The resources used in the production of goods are called _____.

Answer 8

factors of production

Question 9

The total quantity of all resources that an economy has at any one time determines _____.

Answer 9

What that economy can produce.

Question 10

What are the five common ways that factors of production can be classified?

Answer 10

1. Land
2. Labor
3. Physical Capitol
4. Human Capital
5. Entrepreneurship

Question 11

With respect to factors of production, briefly describe “land.”

Answer 11

Commonly called ‘natural resources.’ This encompasses material resources, lumber, water, etc.

Question 12

With respect to factors of production, briefly describe “Labor.”

Answer 12

The human resource. Contributions to the economy made by individuals (i.e., software designers, welders, etc.)

Question 13

With respect to factors of production, briefly describe “Physical Capital.”

Answer 13

Factories and Equipment used in production.

Note: Can also include improvements to natural resources such as hydroelectric dams, canals, etc.

Question 14

The acquisition of physical capital involves _____, and owners of capital must be compensated for use of the resource via ________.

Answer 14

Financial investments

payments of interest

Question 15

With respect to factors of production, briefly describe “human capital.”

Answer 15

The degree to which a given part of the human workforce is trained or educated. Generally, a worker with higher skills and education will perform to a higher level.

Question 16

With respect to factors of production, briefly describe “entrepreneurship.”

Answer 16

The component of human resources that performs the functions of…

1. Raising capital
2. Organizing, managing, and assembling other factors of production
3. Making business policy
4. Taking risks.

Question 17

Define “goods” from an economic standpoint.

Answer 17

All things from which individuals derive satisfaction or happiness.

Note: This can include air to breathe, the beauty of a waterfall or an iPad.

Question 18

Define “economic goods.”

Answer 18

Goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price.

Question 19

Define “bads” as opposed to “goods” from an economic standpoint.

Answer 19

Goods for which the desired quantity is much less than what nature provides at a zero price.

An example would be weeds, brine, or pollution.

Question 20

Define “services.”

Answer 20

Mental or physical labor purchased by consumers.

Question 21

True or False

Services can often be thought of as “intangible goods.”

Answer 21

True

Question 22

True or False

From an economic point of view, the term “needs” is not objectively definable.

Answer 22

True

Question 23

When making a decision about a good or service, the next best alternative is called the _____.

Answer 23

Opportunity Cost.

Question 24

Define “Opportunity Cost.”

Answer 24

The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want.

Question 25

What is a production possibilities curve (PPC)?

Answer 25

A curve representing all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality.

Question 26

True or False
A production possibilities curve (PPC), shows the possibilities available for increasing the output of one good or service by reducing the amount of another.

Answer 26

True

Question 27

True or False

A straight line production possibilities curve (PPC) is common.

Answer 27

False, it is a special case.

Question 28

When the trade-off is not a constant, the PPC is _____.

Answer 28

Curved.

Question 29

Define “technology.”

Answer 29

The total pool of applied knowledge concerning how goods and services can be produced.

Question 30

True or False
The level of technology does not set a limit on the amount of types of goods and services that can be derived from a given amount of resources.

Answer 30

False, the level of technology is the limiting factor.

Question 31

Can you exceed the PPC curve if resources are completely fixed?

Answer 31

No, not without acquiring more resources.

Question 32

Can a nation lie inside the PPC curve?

Answer 32

Yes.

Note: Although this generally implies large unemployment and other economic problems.

Question 33

If a nation’s economy lies inside the PPC curve, is the efficiency considered good or bad?

Answer 33

Bad

Question 34

Define “Efficiency” with respect to economics.

Answer 34

The case in which a given level of inputs is used to produce the maximum output possible.

Question 35

When is an economy considered “productively efficient?”

Answer 35

Whenever it is producing the maximum output with given technology and resources along the PPC.

Question 36

What is an inefficient point?

Answer 36

A point that lies inside the PPC.

Question 37

What is the “law of increasing additional cost.”

Answer 37

The fact that the opportunity cost of additional units of a good generally increases as people attempt to produce more of that good.

Question 38

How can one measure the opportunity cost on a PPC graph?

Answer 38

The displacement of one variable when the other is shifted.

Question 39

True or False

In general, the more specialized the resources, the more bowed the production possibilities curve (PPC).

Answer 39

True

Question 40

Economic growth shows up on a PPC curve when _____.

Answer 40

The curve expands and gets bigger.

Question 41

Define “consumption.”

Answer 41

Spending on new goods and services which detracts from a household’s current income.

Question 42

True or False

When we use productive resources to make capital goods, we are implicitly forgoing current consumption.

Answer 42

True

Question 43

Describe the trade-off between consumption goods and capital goods.

Answer 43

To have more consumer goods in the future, we must accept few consumer goods today because resources must be used in producing capital goods.

Question 44

Define “specialization.”

Answer 44

The organization of economic activity so that what each person (or region) consumes is not identical to what that person or region produces.

Question 45

Define “comparative advantage.”

Answer 45

The ability to produce a good or service at a lower opportunity cost compared to other producers.

Question 46

What is “Absolute Advantage.”

Answer 46

The ability to produce more units of a good or service using a given quantity of labor or resource inputs.

Question 47

People specialize based on their _____ advantage.

Answer 47

Comparative

Question 48

Define “Division of labor.”

Answer 48

The segregation of resources into different specific tasks.