Economics Chapter 1-3 Test Review

circular flow diagram

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

land:

all natural resources (water, sun, plants, oil, trees, stones, animals, etc.)

Entrepreneurship

ambitious leaders that combines the other factors of production to create goods and services (Henry Ford, Bill Gates, Inventors, Store Owners, etc.)...they take risk

The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as the

amount of the other good that must be given up.

Something that induces a person to act is called:

an incentive

Labor

any effort a person devotes to a task for which that person is paid

law of increasing opportunity cost

as you produce more of any good, the opportunity cost will increase

Any point on a country's production possibilities frontier represents a combination of two goods that an economy

can produce using all available resources and technology.

human capital

the skills and knowledge gained by a worker through education and experience (degrees, training

Ramona decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of napping is

the value of the knowledge she would have received had she attended class.

Barb's aunt gave her $100 for her birthday with the condition that Barb buy herself something. In deciding how to spend the money, Barb narrows her options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally she decides on Option B. The opportunity cost of this decision is:

the value to Barb of the option she would have chosen had Option B not been available.

When an economy is operating inside its production possibilities frontier, we know that

there are unused resources or inefficiencies in the economy.

A production possibilities frontier can shift outward if

there is a technological improvement

If an economy is producing efficiently, then

there is no way to produce more of one good without producing less of another good.

Factors of production are:

used to produce goods and services

The opportunity cost of an item is

what you give up to get that item

In a certain economy, jam and bread are produced, and the economy currently operates on its production possibilities frontier. Which of the following events would allow the economy to produce more jam and more bread, relative to the quantities of those goods that are being produced now?

The economy experiences economic growth

Suppose an economy produces two goods, food and machines. This economy always operates on its production possibilities frontier. Last year, it produced 1000 units of food and 47 machines. This year, it is producing 1050 units of food and 52 machines. Which of the following events could not explain the increase in output?

a reduction in unemployment

Suppose that you have received $300 as a birthday gift. You can spend it today or you can put the money in a bank account for a year and earn 5 percent interest. The opportunity cost of spending the money today, in terms of what you could have after one year, is

$315

Three basic economic questions

- How people decide what to buy, How much to work, save and spend? - How firms decide how much to produce, how many workers to hire? -How society divides resources between national defences, consumer goods, and protecting the environment?

Interacting two markets ( in diagram)

- Market for goods and services - Market for factors of production

The circular-flow diagram is an example of:

- an economic model - Visual model of the economy

Suppose an economy only produces two goods, robots and ice cream. Last month, the economy produced 10 robots and 200 gallons of ice cream. This month, the same economy produced 15 robots and 240 gallons of ice cream. Which of the following statements could explain this change?

-This month, the economy reduced the unemployment of its resources. - This month, the economy experienced an improvement in technology. - This month, the economy experienced an increase in resources (((All of the above are correct)))

3 Shifters of the PPC

1. change in resource quantity or quality 2. change in technology 3. change in trade

4 key assumptions of PPC

1. only 2 goods can be produced 2. full employment of resources 3. fixed resources 4. fixed technology

Which of the following is a correct statement about production possibilities frontiers?

An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier.

Output Questions (OOO)

EX. Henry and Joanne like to study insects. Henry can catch 4 lightening bugs or 6 crickets. Joanne can catch 24 lightening bugs or 12 crickets. (production items)

Input Questions (IOU)

EX. It takes Canada 8 months to produce one car or 10 months to produce one plane. It takes Japan 15 months to produce one car or 12 months to produce one plane. ( dealing with time or things that make the 1 product)

Decision MAkers (Firms and Households)

Market for goods and services Market for factors of production (inputs)

Trade-off

Giving up one thing for another

How people make decisions

People face trade-offs The cost of something is what you give up to get it Rational people think at the margin People respond to incentives

Constant Opportunity Cost

Resources are easily adaptable (interchangeable) for producing either good

profit=

Revenue -costs

When constructing a production possibilities frontier, which of the following assumptions is not made?

The quantities of the factors of production that are available are increasing over the relevant time period.

Economics

The study of how society uses its limited resources to satisfy unlimited wants

Comparative advantage

describes the opportunity costs faced by two producers.

Macroeconomics is the study of

economy-wide phenomena.

Which of the following concepts cannot be illustrated by the production possibilities frontier?

equality

Two decision makers( in diagram)

firms and households

In the simple circular-flow diagram, the participants in the economy are:

households and firms

In the markets for goods and services in the circular-flow diagram,

households are buyers and firms are sellers

In the markets for the factors of production in the circular-flow diagram,

households are sellers and firms are buyers.

Microeconomics is the study of

how individual households and firms make decisions

physical capital

human made resources that is used to create goods and services (tools, tractors, machinery)

When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good

increases as more of the good is produced

4 factors of production

land, labor, human/physical capital, entrepreneurship

Scarcity

limited resources and unlimited wants

In the circular-flow diagram, which of the following is not a factor of production?

money

Production is efficient if the economy is producing at a point

on the production possibilities frontier.

per unit opportunity cost formula

opportunity cost/units gained

The production possibilities frontier provides an illustration of the principle that

people face trade-offs.

Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that

people face tradeoffs.

Unemployment would cause an economy to

produce inside its production possibilities frontier.

Economists believe that production possibilities frontiers are often bowed because

resources are not completely adaptable

Resources are:

scarce for individuals and scarce for economies

Fundamentally, economics deals with

scarcity

Production possibilities frontier:(PPC)

shows the combinations of outputs for the economy given the available factors of production: - Explain concept in words - Use numbers as examples - Generate graphs from numbers - Make generalizations using graph

margins

systematic adjustments that help maximize profits

A rational decisionmaker

takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.

Opportunity Cost

the ability to produce a good at a lower opportunity cost than another producer (whatever must be given up to obtain some item)

Absolute Advantage

the ability to produce a good using fewer inputs than another producer

absolute advantage

the ability to produce the most output or require the least amount of inputs

The production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and

the available production technology

You have driven 800 miles on a vacation and then you notice that you are only 15 miles from an attraction you hadn't known about, but would really like to see. In computing the opportunity cost of visiting this attraction you had not planned to visit, you should include:

the cost of driving the next 15 miles, but not the cost of driving the first 800 miles.