AP Macro Unit 1

2. The marginal cost of an activity is a measure of ________ the activity. * a. A) what is forgone with every one unit increase in b. B) the total cost ofThis answer is incorrect. c. C) the benefit derived from every one unit decrease in d. D) the benefit derived from every one unit increase in e. E) sunk cost of

a

resource captial

aid/tools in production physical-tangible human-acquired knowledge and skill payoff- interest

Full Employment

all available resources are used - employment for all workers -no idle capital no arable- empty land

resource- land

all natural resources- payoff rent

Economic growth

an increase in productive capacity of a country seen as an outward shift of the PPC- includes an increase in productivity as a result of the enhancement of human capital, physical capital, or technology

specialization

-countries or individuals should focus on individualization -gain expertise -individual preferences can be expressed -you eliminate wasted time switching between tasks -possibility for the introduction of time saving capital

Assumptions of the PPC Model

1) specific period of time 2) limited number of variable 3) Resources are limited in quantity and quality 4) level of technology is fixed 5) ruled of the game can't change

Question 1 1) A country has a comparative advantage in the production of a good if it can * a. A) produce more of the good than another country. b. B) produce more of the good most efficiently. c. C) produce the good on and remain on its production possibilities frontier. d. D) trade-off producing the good for another good. E) produce the good at the lowest opportunity cost.

e

resource- labor

physical or mental labor efforts used for goods/services payoff- wages

allocative efficiency

resources go to the highest valued use; subjective

Incentives

rewards that encourage us or a penalty that discourages

Production Possibilities Curve-Frontier

shows alternative combinations of production choices if resources are used fully and efficiently

Comparative Advantage

the ability to produce goods and services at a lower opportunity cost than other producers

Absolute Advantage

the ability to produce goods and services using fewer resources than other producers (who can produce things in the lesser amount of time; time being a resource

Marginal Analysis

the method of finding the optimal amount of any activity by comparing all of the relevant alternatives systematically and incrementally

imports

when goods and services are purchased from other countries

exports

when goods and services are sold to other countries

trade

when individuals provide goods and services to others and receive goods and services in return

Market Failure

when people acting in RPSI leads to undesirable results

Trade-off

when you give up something in order to get something else

resources- entrepanuerialability

managerial- organizational skills necessary to start a firm willingness to take risks payoff profit

David Ricardo

-coined the law of comparative advantage -individuals or countries need to follow the law of comparative advantage, saying that the individual with the lowest opportunity cost in production of a good or service should specialize in producing that good

Question 1 1. A production possibilities frontier shows: * a. A) the various combinations of output a nation can produce at a certain time, given its available resources and technology. b. B) the limits to future growth of a nation. c. C) how money can be allocated among two kinds of goods. d. D) that if price of one good decreases, the price of the other has to increase. e. E) that it is impossible to produce inefficiently.

a

Question 3 3. Which of the following is true? (I. A rational choice is always made in the pursuit of social interest. ) (II. Economics is a social science.) (III. Economists try to understand how the economic world works by testing positive statements.) * a. A) II and III b. B) Only I c. C) Only II d. D) Only III e. E) I and II

a

Question 4 4.________ the owners of the factors of production, while ________ what amounts of those factors to hire. * a. A) Households arefirms determine b. B) Households arethe government determines c. C) The government is firms determine d. D) Firms are households determine e. E) Firms are the government determines

a

scarcity

a condition that exists when our wants or demands are greater than the resources price at $0

Sunk Cost

a cost that has already incurred and cannot be recovered

Resources/ Factors of Production (FoP)

an input to produce a good or service that people want

attainability

anything on the line or inside

2. Scarcity exists because: a. A) human wants exceed the resources available to satisfy them. B) some individuals have low income. c. C) the costs of production are high. d. D) some people make bad economic decisions. e. E) people take too much leisure time.

b

4. Which of the following pairs do not match? a. A) labor and wages b. B) labor and rent c. C) entrepreneurship and profit d. D) human capital and interest e. E) physical capital and interest

b

5. Which of the following statements is/are normative? (I. The price of gas is rising) (II. The price of gas is too high) (III. Gas prices are expected to fall in the near future) a. A) I only b. B) II only c. C) III only d. D) I and III only e. E) I, II, and III

b

Question 3 3. Gains from trade * a. A) occur when one party to the trade has an absolute advantage in both goods. b. B) result in being able to consume beyond the trading individuals' production possibilities frontiers. c. C) occur when people do not specialize. d. D) occur when opportunity costs are equal. e. E) always benefit one party but not the other party of any trade.

b

Law of Increasing Opportunity Cost

because resources are not perfectly suitable the opportunity cost gradually increases as we begin to produce more of the other good or service; bowed out instead of straight line

Assumption #1 "Economizing Problem/Choice"

because we cannot have it all, we must decide what we will have and what we will give up

1. Macroeconomics deals with: * a. A) bits and pieces of the economy b. B) the question of how a business unit should operate profitably c. C) the working of the entire economy d. D) how individuals make decisions e. E) government regulation of immigration laws

c

3. Physical capital, as a factor of production, refers to a. A) money, stocks, and bonds. b. B) the production technology used by firms. C) the physical goods used to produce other goods and services. d. D) the production factors imported from abroad. e. E) stocks, and bonds but not money.

c

Question 3 3. Moving from one point to another on a production possibilities frontier implies * a. A) increasing the production of both goods. b. B) decreasing the production of both goods. c. C) increasing the production of one good and decreasing the production of another. d. D) holding the production levels of both goods constant e. E) changing the amount of factors of production that are employed.

c

Question 4 4. If the opportunity cost of manufacturing machinery is lower in Britain than in the US and the opportunity cost of manufacturing sweaters is lower in the US than in Britain, then the US will: * a. A) export both sweaters and machinery to Britain b. B) import both sweaters and machinery from Britain c. C) export sweaters to Britain and import machinery from Britain d. D) import sweaters from Britain and export machinery to Britain e. E) neither import, nor export goods with Britain

c

Question 6 6. The United States is one of the richest nations in the world: * a. A) so does not need to trade with poor nations in order to achieve any gains from trade. b. B) so might not have a comparative advantage in producing any goods. c. C) but it can still benefit from specialization and trade. d. D) so it must have a comparative advantage in the production of all goods. e. E) so it must have an absolute advantage in the production of all goods

c

Invisible Hand Theory

coined by Adam Smith; when everyone acts in RPSI, there is an invisible hand that is guiding society to be better as a whole

Adam Smith

coins capatalism, founder of modern economics, believes in specialization

efficiency

condition that exists when there is no way resources can be recombined to increase the production of one good without decreasing the production of another

1. Which of the following is an example of a resource? (I. Petroleum) (II. A factory) (III. A cheeseburger dinner) a. A) I only b. B) II only c. C) III only d. D) I and II only e. E) I, II, and III

d

Question 2 2. While moving along a production possibilities frontier, the amount of labor ________, the amount of capital ________, and the level of technology ________. * a. A) is fixed is fixedvaries b. B) varies is fixedvaries c. C) varies is fixed is fixed d. D) is fixed is fixed is fixed e. E) varies variesvaries

d

Question 4 4. Assume that an association of young workers has lobbied Congress to require that all workers retire once they reach the age of fifty. What impact would this law have on the nation's production possibilities frontier? * a. A) no impact at all b. B) The level of unemployment would decrease so the production possibilities frontier would shift outward. c. C) The nation would move to a new position on its production possibilities frontier but the frontier itself would not shift. d. D) The production possibilities frontier would shift inward. e. E) The number of young workers would increase so the production possibilities frontier would shift outward.

d

Question 2 2. Economists generally believe that a country should specialize in the production of a good or a service if: * a. A) the PPC is larger than that of any other country b. B) the PPC is smaller than that of any other country c. C) the country can produce the product using fewer resources than any other country d. D) the country can produce more of all goods than any other country e. E) the country can produce the product while forgoing fewer alternative products than any other country

e

Question 5 5. Hank requires 1 hour to cut the grass and 3 hours to clean the house. His sister Holly requires 1 hour to cut the grass and 4 hours to clean the house. Which of the following statements is true? * a. A) Hank has a comparative advantage in both cutting the grass and cleaning the house. b. B) Hank and Holly both have a comparative advantage in cutting the grass. c. C) Hank has a lower opportunity cost of cutting the grass. d. D) Hank has an absolute advantage in both cutting the grass and cleaning the house. e. E) Holly has a comparative advantage in cutting the grass.

e

Question 5 5. Why is a production possibilities frontier bowed out (concave)? * a. A) The bowed shape reflects constant opportunity cost. b. B) The bowed shape reflects decreasing opportunity cost. c. C) The bowed shape indicates that opportunity cost at first decreases at a decreasing rate, and then begins to decrease at an increasing rate. d. D) The bowed shape indicates that opportunity cost at first increases at a decreasing rate, and then begins to increase at an increasing rate. e. E) The bowed shape reflects increasing opportunity cost.

e

Question 5 5. You can either spend $100 on a new economics textbook or a new CD player. If you choose to buy the new economics textbook, the opportunity cost is: * a. A) $100. b. B) the new economics textbook. c. C) both the $100 and the new CD player. d. D) impossible to determine. E) the new CD player.

e

productive efficiency

goods and services are produced in the least costly ways; if on the curve

The Law of Diminishing Marginal Utility

if we keep increasing another unit, the utility will start to diminish; as you consume a product, your additional happiness from consuming one more unit falls

Assumption #3 "Rational pursuit of self interest"

individuals look to pursue opportunities to increase their utility

Economics

the study of how people fulfill their unlimited wants in a world where resources are scarce

Transaction Cost

the time in information gathering required to make a decision

Assumption #2 "there is no such thing as a free lunch"

we live in a world where resources are scarce and someone is always going to have to pay