Midterm 1: Chapter 2

Question 1

What is Microeconomics?

Answer 1

Small parts and looking at one market or industry in the economy

Question 2

What is Macroeconomics?

Answer 2

whole thing, economy wide

Question 3

What is the Circular-Flow Diagram?

Answer 3

visual model of the economy, shows how dollars flow through markets among households and firms

Question 4

Who are the two groups of decision makers?

Answer 4

Households and firms

Question 5

What is the role of households?

Answer 5

• Own the factors of production, sell/rent them to firms for income
• Buy and consume goods and services

Question 6

What is the role of firms?

Answer 6

• buy/hire factors of production, use them to produce goods and services
• sell goods and services

Question 7

What are the two markets?

Answer 7

1. goods and services

2. factors of production

Question 8

What are factors of production?

Answer 8

the resources the economy uses to produce goods and services

Question 9

What are the factors of production?

Answer 9

1. labor
2. land
3. capital (building and machines)

Question 10

In the market for goods and services who is the buyer and who is the seller?

Answer 10

seller = firms
buyer = households

Question 11

In the market for factors of production who is the buyer and who is the seller?

Answer 11

seller = households
buyer = firms

Question 12

What is the Production of Possibilities Frontier (PPF)?

Answer 12

A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

Question 13

What is given to create a PPF graph?

Answer 13

• max labor hours
• 2 items
• the hours the 2 take to produce

Question 14

What is happening when there are points under (inside) the PPF?

Answer 14

The nation is not using all the available resources or is using inferior technology or both

Question 15

Is it possible to operate under the PPF?

Answer 15

yes, but it is not efficient

Question 16

When there is a point under the PPF can you increase what you are producing?

Answer 16

Yes you can increase both products at the same time

Question 17

Is it possible to have a point above (outside) the PPF?

Answer 17

no because the economy only has so many labor hours and resources to produce products

Question 18

What does it mean to have a point on the PPF?

Answer 18

this means you have enough resources and labor hours to produce at any point along this line

Question 19

When there is a point on the PPF can you increase what you are producing?

Answer 19

yes, but to increase one you have to decrease the other in order to stay on the line

Question 20

How does the PPF show trade-offs?

Answer 20

once we have reached a certain point on the frontier, the only way of producing more of one good is to produce less of the other

Question 21

How does the PPF show opportunity cost?

Answer 21

when deciding on a trade off, the cost of one good is measured in terms of the other good

Question 22

Example: If normally we produce 100 oranges and 200 strawberries, but then decide to produce 200 oranges and 100 strawberries, what is the opportunity cost of producing 100 more oranges?

Answer 22

100 strawberries

Question 23

How does the PPF illustrate economic growth?

Answer 23

the PPF can shift due to something like a technological advancement which gives us the ability to produce more of both goods which shows economic growth.