Economics Final Exam Unit One Review

What is the difference between a good and a service?

A good is a physical article produced for sale and use, whereas a service is work done by someone else for which a consumer is willing to pay.

Write a scenario that best describes Law of Diminishing Marginal Utility.

A new toy is less exciting for a child who has many than for one who has few.

What is the difference between absolute and comparative advantage?

Absolute advantage exists when one person can produce more of a good or service using less resources than someone else. Comparative advantage exists when someone can produce a good or service at less of an opportunity cost than someone else.

What is the law of unintended consequences?

Actions often have unforeseen effects.

Why did the Soviet Union experience many shortfalls and surpluses?

Economic planning was done by the government committees of economists, production experts, and political officials. They decided what should be produced, who should produce it, and who should have access to it (by setting wages and prices).

Which economic goals are most important in a traditional economy?

Economic stability and economic security.

What is the often debated, fourth possible factor of production?

Entrepreneurship.

Economists assume people choose something when its expected costs are less than its ______

Expected benefits.

What are the factors of production?

Labor, land, and capital (and entrepreneurship).

What is the difference between microeconomics and macroeconomics?

Microeconomics studies economic choices of individuals, households, and businesses. Macroeconomics studies the economy as a whole.

Why are tradeoffs necessary?

Resources are limited.

What term is most closely related to tradeoffs?

Scarcity

What is one example of the Law of Diminishing Marginal Utility?

The more pizza you eat, the less satisfying each new slice will be.

What does it mean to say that free markets are efficient?

Buyers and sellers can exchange goods and services until they are satisfied.

What are three examples of public works?

Dams, highways, and sewers.

What are three examples of renewable resources?

Forests, fresh water, and fish.

What does Guns vs. Butter mean?

Guns vs. Butter is the classic example of a production possibilities frontier. In theory, only two goods can be produced and a decision must be made regarding how much of each good to produce.

Why might some historians consider Adam Smith one of the most influential people in history?

He introduced a way of thinking about economic theory. (The Invisible Hand)

What are the three fundamental economic questions?

How are goods and services to be produced? What goods and services are to be produced? For whom are goods and services to be produced?

What are the three types of capital resources?

Human capital (knowledge), financial capital (money), and physical capital (buildings).

What is the best test of an economic model?

If it can both explain past events and predict future events.

Describe how a model Free Enterprise system works.

Individuals own the factors of production and make decisions about how to use these factors within the framework of the law.

What does Adam Smith's idea of the "invisible hand" represent?

It explains how an individual's pursuit of economic self-interest can promote the well-being of society as a whole.

What is a circular flow model?

It explains how money, goods, and services are exchanged between firms and households.

What is negative and marginal utility?

Marginal utility is the extra satisfaction or pleasure you will get from an increase of one additional unit of a good or service. Negative utility is a lack of pleasure from consuming a good or service.

In which type of economy does the government and people play and important role with regard to production and consumption?

Mixed economy.

Why are economies most efficient when they are at full employment?

No productive resources are left unused.

What is the difference between perpetual, renewable, and nonrenewable resources?

Perpetual resources are always available and aren't in danger of being used up. Renewable resources can be replaced with proper planning. Nonrenewable resources are gone forever once they are used up.

What is the difference between positive and normative economics?

Positive economics is how things are presently. Normative economics is how things ought to be.

How does the Commerce Clause promote economic interdependence?

The Commerce Clause gives Congress the power to regulate interstate trade, which empowers the national government to promote interdependence between states.

What is opportunity cost?

The value of the next best alternative in a decision.

What are the economic goals of each of the three economic systems?

Traditional economies focus on economic stability and security. Original command economies focused on accumulating wealth for the upper class while keeping economic stability, but modern command economies focus on security and equity. Market economies focus on economic freedom and efficiency.

What does the term economic interdependence tell you?

We depend on other people or countries to produce many of the goods and services that we want when we specialize in what we have a comparative advantage in.

Identify an economic enigma in your everyday life. Why is it an enigma?

Why does popcorn at the movies cost more than at the grocery store? The answer can be found through economic analysis.