Chapter 1: What is Economics?

Scarcity

Basic economic problem that results from a combination of limited resources and unlimited wants.

Production Possibilities Curve

Graph showing the maximum combinations of goods and services that can be produced from a fixed amount of resources in a given period of time.

Land

Natural resources and surface land and water.

Capital

Previously manufactured goods used to make other goods and services.

Factors of Production

Resources of land, labor, capital, and entrepreneurship used to produce goods and services.

Opportunity Cost

Value of the next best alternative given up for the alternative that was chose.

Productivity

The amount of output (goods and services) that results from a given level of inputs (land, labor, capital, and entrepreneurship).

Macroeconomics

The branch of economic theory dealing with the economy as a whole and decision making by large units such as governments.

Microeconomics

The branch of economic theory that deals with behavior and decision making by small units such as individuals and firms.

Economy

The production and distribution of goods and services in a society.

Economics

The study of how people make choices about ways to use limited resources to fulfill their wants.

Technology

The use of science to develop new products and new methods for producing and distributing goods and services.

Factors of production include which of the following? a. land, labor, capital, and entrepreneurship b. technology products and entrepreneurship c. goods and services d. all of the products produced in an economy

a. land, labor, capital, and entrepreneurship

Economic Models

A theory or simplified representation that helps explain and predict economic behavior in the real world.

Services

Actions that can satisfy people's wants or needs.

Trade-off

Sacrificing one good or service to purchase or produce another.

Goods

Tangible objects that can satisfy people's wants or needs.

Entrepreneurship

When individuals take risks to develop new products and star new businesses in oreder to make profits.

In the time period covered by the production possibilities curve, the company decides to make four gallons of red paint. How many gallons of blue paint can the company make with the available time and resources? a. 2 b. 3 c. 6 d. 8

a. 2

A car used by a messenger service is a type of... a. capital. b. labor. c. trade-off. d. opportunity cost.

a. capital

A company's office buildings are an example of... a. capital. b. labor. c. land. d. entrepreneurship.

a. capital

"Economic literacy is [like] having a working knowledge of a foreign language. If you are with a group of foreigners and don't speak their language at all, . . . you feel excluded. . . . If you have a rudimentary working knowledge of the language, you can at least follow the drift of the conversation, ask a few questions and feel that, even if you are not getting the fine points, you are not totally left out and you have a basis for acquiring more knowledge. That, it seems to me, is what economic literacy means—a rudimentary working knowledge of the concepts and language of economic activity. . . ." According to Alice Rivlin in the passage, if you have a rudimentary (basic) working knowledge of economic concepts, you will be... a. left out of conversations about economic issues. b. able to ask questions to gain more knowledge. c. unable to talk about economic issues with foreigners. d. able to understand the fine points about economic issues.

b. able to ask questions to gain more knowledge.

After creating an economic model, how can an economist determine if the model does a good job of representing reality? a. by asking other economists for their opinions on the matter b. by testing the model with facts collected from the real world c. by recording the factors of production for an imaginary business d. by formulating theories about how the economy works

b. by testing the model with facts collected from the real world

"The study of economic theory is not defensible on aesthetic grounds--it hardly rivals in elegance the mathematics or physics our sophomores learn. The theory is studied only as an aid in solving real problems, and it is good only in the measure that it performs this function." According to this author, a good economic theory is one that... a. is as elegant as a theory in mathematics or physics. b. helps solve real problems. c. includes mathematics. d. is aesthetically sound.

b. helps solve real problems.

What factor of production do these images illustrate? a. labor b. land c. capital d. entrepreneurship

b. land

What is the basic problem of economics? a. pricing b. scarcity c. consumer behavior d. government policies

b. scarcity

Economists build economic models... a. to describe how a business should combine the factors of production to produce goods. b. to help analyze economic behavior. c. to find out how high teenage unemployment is. d. to help consumers determine their opportunity costs.

b. to help analyze economic behavior.

What factor of production do these images illustrate? a. land b. labor c. capital d. entrepreneurship

c. capital

The value of the next best alternative that has to be given up for the action that is chosen is the... a. factor of production. b. trade-off. c. opportunity cost. d. productivity.

c. opportunity cost

Entrepreneurship refers to the ability to... a. manage other people. b. adapt technology efficiently. c. start new businesses, introduce new products and processes, and improve management techniques. d. borrow capital successfully and expand an existing business to meet customer demand.

c. start new businesses, introduce new products and processes, and improve management techniques.

Economics is primarily concerned with which of the following? a. future costs of goods b. values and objectives of a society c. use of resources d. methods of production

c. use of resources

A production possibilities curve helps determine... a. factors of production. b. costs of production. c. all the opportunity costs and trade-offs that a business will face during a year. d. the maximum combinations of goods and services that can be produced in a given time.

d. the maximum combinations of goods and services that can be produced in a given time.

Study the graph. Suppose this nation starts with producing all military goods, represented by point A. It then decides to produce a mix of civilian and military goods, represented by point B. What represents the cost in military goods given up? a. the vertical distance between point x and point y b. the horizontal distance between point y and point z c. the horizontal distance between point z and point E d. the vertical distance from point A to point x

d. the vertical distance from point A to point x