Principles of Microeconomics Test 1

What is the english translation of the latin phrase Ceteris Paribus?

"Other things constant"

What factors determine the position of a production possibilities curve? (4 answers)

1. An increase in the economy's resource base would expand our ability to produce goods and services. 2. Advancements in technology can expand the economy's production possibilities. 3. An improvement in the rules under which the economy functions can also increase output. 4. By working harder and giving up current leisure, we could increase our production of goods and services.

***What are the five basic questions of economy must face?*** (most important question)

1. How much will be produced? 2. What will be produced? 3. How will it be produced? 4. Whom will be produced for? 5. What is the products adaptability?

What are the sources of gains from trade? (3 answers)

1. Specializations and devision of labor 2. Mass production processes, 3. The dissemination of improved products and production methods.

What are the three basic rights of private property to private property owners?

1. The right to exclusive use of the property. 2. Legal protection against invasion from other individuals who would seek to use or abuse the property without the owner's permission. 3. The right to transfer, sell, exchange, or mortgage the property.

What are the common pitfalls to avoid in economic thinking? (4 answers)

1. Violation of the ceteris paribus condition 2. Good intentions do not guarantee desirable outcomes. 3. Association is not causation 4. The fallacy of composition

How does trade create value? (2 answers)

1. When individuals engage in a voluntary exchange, both parties are made better off. 2. By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society's resources.

What is the Production Possibilities Curve?

A curve that outlines all possible combinations of total output that could be produced, assuming (1) a fixed amount of productive resources, (2) a given amount of technical knowledge, and (3) full and efficient use of those resources.

What is the Law of Competitive Advantage?

A principle that states that individuals, firms, regions, or nations can gain by specializing in the production of goods that they produce cheaply (at a low opportunity cost) and exchanging them for goods they cannot produce cheaply (at a high opportunity cost)

What is the Law of Supply?

A principle that states there is a direct relationship between the price of a good and the quantity of it producers are willing to supply. As the price of a good increases, producers will wish to supply more of it, and vice versa.

What is the Law of Demand?

A principle that states there is an inverse relationship between the price of a good and the quantity of it buyers are willing to purchase. As the price of a good increases, consumers will wish to purchase less of it, and vice versa.

What are the two methods of economic organization? Define each.

Capitalism and Socialism. Capitalism is an economic system in which productive resources are owned privately and goods and resources are allocated through market prices. Socialism is an economic system in which the ownership and control of the basic means of production rest with the state, and recourse allocation is determined by centralized planning rather than market forces.

What does Ceteris Paribus mean?

Ceteris Paribus is the recognition that when the effect of one change is being described, if other things change around it, the result could be affected.

What is the economic way of thinking?

Economic thinking = scientific thinking. Scientific thinking is developing a theory from basic principles and testing it against events in the real world. Good theories are consistent with & help explain real-world events.

What is the fallacy of composition?

Erroneous view that what is true for the individual (or the part) will also be true for the group (or the whole).

Why do people engage in exchange?

Exchanging happens because of limited resources, (scarcity). Thus, in order to get what we want, an exchange of some kind must take place due to the nature of our limited world.

Why does scarcity necessitate rationing and cause competition?

If a good or resource is scarce, that means that a limited amount of people will be able to utilize that good or resource. Thus, a competition of some kind naturally develops, but how that competition takes shape is dependent upon the society and how it functions.

What are substitutes?

Products that serve similar purposes. An increase in the price of one will cause an increase in demand for the other.

How does scarcity differ from poverty?

Scarcity is an objective concept that defines a factual situation. Poverty, on the other hand, is a subjective concept that refers to varying opinions of whether someone meets an arbitrarily defined level of income.

What is Scarcity?

Scarcity is the fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like.

What does the slope on a production possibilities curve graph indicate?

The amount of one product that must be given up to produce more of the other.

What is Macroeconomics?

The branch of economics that focuses on how human behavior affects outcomes in highly aggregated markets, such as the markets for labor or consumer products?

What is Microeconomics?

The branch of economics that focuses on how human behavior affects the conduct of affairs within narrowly defined units, such as individual households or business firms.

What is the definition of transaction costs?

The time, effort, and other resources needed to search out, negotiate, and complete an exchange.

Why do economists put so much emphasis on opportunity cost?

Opportunity cost is the natural outworking of scarcity, which means that opportunity cost is the central theme of human behavior in an economy.

Why is scarcity important even in relatively wealthy economies?

Our desire for goods and services is far greater than their availability from nature. Thus, we are forced to make choices.

What is a middleman and what effect do they have on a transaction?

People who buy and sell goods or services or arrange trades. A middle reduces transaction costs.

What is the difference between positive and normative economics?

Positive economics are the scientific study of "what is" among economic relationships, while normative economics are judgements about "what ought to be."

How does private ownership affect the use of resources?

Private ownership provides people with a strong incentive to take care of things and develop resources in ways that are highly valued by others.

What is Opportunity Cost?

The loss of potential gain from other alternatives when one alternative is chosen