Economics Chapter 1 Test Review

Describe opportunity costs

In most trade-offs, one of the rejected alternatives is more desirable than the rest. The most desirable alternative somebody gives up as a result of a decision is the opportunity cost.

What are the factors of production?

The factors of production are the resources that are used to produce goods and services. These include land, labor, human capital, and physical capital. Land includes natural resources such as forests, water, coal, etc. to provide goods and services. Labor includes the effort people are putting into their production of goods and services. Human capital includes the knowledge and skills a worker has to help produce goods and services. Physical capital includes man-made objects that are used to help produce goods and services.

Describe production possibilities frontier

The line on a production possibilities curve that shows the maximum possible output an economy can produce is called the production possibilities frontier. Each point on the production possibilities frontier reflects a trade-off. These trade-offs are necessary because factors of production are scarce. Using land, labor, and capital to make one produce means that fewer resources are left to make something else.

What is the main focus of economics?

The main focus of economics is how people make economic decisions to satisfy their needs and wants. Scarcity of resources forces people to make these decisions.

physical capital

the human-made objects used to create other goods and services

human capital

the knowledge and skills a worker gains through education and experience

How does a nation decide what and how much to produce?

A nation decides what to produce and how much to produce by first looking at their resources. Since resources are scarce in the environment, a nation needs to decide how to most efficiently utilize their resources to create goods and services for consumers. A nation will generally use a production possibilities curve and frontier to determine what is the most efficient use of their resources. The frontier allows them to see the maximum output of products from a limited amount of resources. A nation would be able to then decide what is the best utilization of resources to produce certain goods and services.

Describe how a curve can show growth.

A production possibilities curve can also show growth. When an economy grows, the curve shifts to the right. However, when an economy's production capacity decreases, the economy slows and the curve shifts to the left.

Describe efficiency

A production possibilities frontier represents an economy working at its most efficient level. Sometimes, an economy works inefficiently and it uses fewer resources than it is capable of using. This is known as underutilization.

Why do all economic decisions involve trade-offs?

All economic decisions involve trade-offs because of the concept of scarcity. Resources are limited in the world, but people have unlimited wants. In order to satisfy our wants, we need to be willing to make sacrifices and choices between the alternatives. We can't make a decision without giving something up and those trade-offs are the alternatives that we choose to give up.

Why are goods and services scarce?

All goods and services are scare because the resources used to produce them are scarce. There are only so many natural resources available to produce particular goods. The amount of labor available to produce goods and services can be limited. Physical capital is also limited for many industries. Each resource may also have alternative uses. Individuals, businesses, and governments have to choose which alternative they want most.

Describe trade-offs

All individuals, businesses, and large groups of people make decisions that involve trade-offs. Trade-offs involve things that can be easily measured such as money, property, and time or things that cannot be easily measured, like enjoyment or job satisfaction.

Describes business and government use of trade-offs.

Businesses make trade-offs when they decide how to use their factors of production. For example, a farmer who uses his/her land to plant broccoli cannot use that same land to plant squash. Governments also make trade-offs when they decide to spend their money on military needs instead of domestic one and vice versa.

What are the benefits of capital?

Capital is a key factor of production because people and companies can use it to save a great deal of time and money. The benefits of capital include: increased efficiency increased knowledge better time management increased productivity

Describe the capital factor of production.

Capital refers to any human-made resource that is used to produce other goods and services. An economy requires both physical and human capital to produce goods and services. Physical capital includes: buildings, equipment, tools Human capital includes: a college education, training, job experience

Describe economics

Economics begins with the idea that people cannot have everything they need and want. The fact that limited amounts of goods and services are available to meet unlimited wants is called scarcity. Scarcity forces people to make choices but it is not the same as a shortage. Shortages are temporary while scarcity always exists.

Describe production possibilities.

Economists often use graphs to analyze the choices and trade-offs that people make. A production possibilities curve is a graph that shows alternative ways to use an economy's productive resources. To draw a production possibilities curve, an economist begins by deciding which goods or services to examine.

What do economists by efficiency?

Efficiency means using the resources in a way that produces the maximum output of products possible. In order for an economy to grow, resources must be utilized in the best way possible. Through efficient production, more products can be produced for consumers to purchase. Maximizing production in the shortest possible time, without sacrificing the quality of products is the main goal of economics.

What role to entrepreneurs play in economics?

Entrepreneurs play a key role in turning scarce resources into goods and services. Entrepreneurs are willing to take risks in order to make a profit. They: develop original ideas start businesses create new industries fuel economic growth An entrepreneur's first task is to assemble the factors of production: land, labor, and capital.

Why does every choice involve an opportunity cost?

Every choice involves an opportunity cost because every decision we make involves giving up some other alternative. Even if there's only two options in a choice, the one we sacrifice is the opportunity cost because it's the next-best-option, or most desired alternative that we sacrificed. If there were no options, there would be no decision to be made. In every decision, we must give something up.

How does opportunity cost affect decision making?

Every time we choose to do something like sleep in late, we are giving up the opportunity to do something less, like study an extra hour for a big test. When we make decisions about how to spend our scarce resources, like money or time, we are giving up the chance to spend that money or time on something else.

Describe the labor factor of production

Labor is the effort people devote to tasks for which they are paid. Labor includes: the medical care provided by a doctor the classroom instruction provided by a teacher the tightening of a bolt by an assembly-line worker the creation of a painting by an artist the repair of a television by a technician

Describe the land factor of production

Land refers to all natural resources used to produce goods and services. These resources include: fertile land for farming oil coal iron water forests

Describe decision making on the margin.

Like opportunity cost, thinking at the margin applies not just to individuals, but to businesses and governments as well. Employers think at the margin when they decide how many workers to hire. Legislators think at the margin when they decide how much to increase government spending on a particular project.

Give two examples of a decision that your school or local government might have to make. Explain how each decision involves trade-offs.

One example of a decision that my school might have to make is the choice of purchasing new chromebooks for every student. This would involve a trade-off because they would have to either potentially sacrifice some of the students' ability to complete their schoolwork or spend more of the school's budget on the laptops for everyone to use. Another example of a decision that my local government might have to make is whether or not to use some spending on repaving the roadways. This would involve a trade-off because the government would have to choose whether to sacrifice the public safety due to poor road conditions, or choose to spend more of their money in order to protect others and keep the roads safe. In each of these situations, the school or local government has to make a choice, sacrificing something, involving trade-offs.

How does opportunity cost affect decision making? (CT question)

Opportunity cost affects decision making by showing us our options and asking what we're willing to sacrifice. In simple decisions, we must look at the costs and benefits of each alternative. When looking at the opportunity cost, it shows us our most desired alternative and we have to decide whether we're willing to give it up or not. If we're not, then we won't make that decision to sacrifice it for another alternative. It makes us aware of what we're giving up.

Describe how a curve can show cost.

Production possibilities curves can be used to determine the opportunity costs involved in making an economic decision. Cost increases as production shifts from making one item to another. The law of increasing costs help explain the production possibilities curve. As we move along the curve, we trade off more and more for less and less output.

How do production possibilities curves show alternative uses of resources?

Production possibilities curves show alternative uses of resources by displaying how many resources are available to be used to produce two different goods and services. They are a graph to show the different trade-offs possible based on different combinations of the same resources. A production possibilities frontier is then drawn on the graph to show a line of efficiency, which shows us the most efficient uses of our resources. Everywhere the line goes is an alternative use of our resources that would be efficient and helpful to economic growth. Each point shows efficient uses of our same resources in different trade-offs.

How does scarcity differ from a shortage?

Scarcity differs from a shortage because a shortage is a temporary depletion of resources to produce a particular good or service, while scarcity refers to a permanent limitation of resources. While they both force consumers to make economic choices, scarcity always exists (is constant), while a shortage only temporarily occurs.

How does scarcity force people to make economic choices?

Scarcity forces all of us to make choices by making us decide which options are the most important to us. The principle of scarcity states that there are limited goods and services for unlimited wants. Thus, people need to make choices in order to satisfy the wants that are most important to them. People satisfy their needs and wants with goods and services. People's needs and wants are unlimited, yet goods and services are limited.

How does scarcity force people to make economic choices? (2)

Scarcity forces people to make economic choices by limiting the amount of resources available to satisfy the people's unlimited wants and needs. With limited resources, consumers are forced to make a choice on what they want to purchase through a tradeoff, while giving up something in exchange. They need to make the choice to purchase their most important wants because there's not enough resources to supply all of our wants.

Describe technology and education in relation to economy.

Technology can increase a nation's efficiency. Many governments spend money investing in new technology, education, and training for the workforce.

How does technology increase production possibilties?

Technology increases production possibilities by increasing the efficiency of resources. Technology can increase our production time and allows us to produce the maximum amount of products that we can create in relation to the resources that we have. On a production possibilities curve, the frontier would be able to shift to the right and increase due to technology's aid in production. Additionally, technology keeps the quality of products while maximizing the quantity.

Describe cost/benefit analysis

The cost/benefit analysis shows opportunity costs and benefits of the alternatives in a decision.

What is the difference between goods and services?

The difference between goods and services is that goods are man-made objects that are desired by consumers, while services are actions that laborers with the knowledge complete for a consumer.

Identify the opportunity cost in the most recent consumer purchase you made. Explain what you gave up and why you chose to purchase the item you did.

The most recent consumer purchase I made was a choice for shirts for picture day. I was between two different shirts in two different colors. While I did like both of the shirts, I chose shirt #1. In return, the opportunity cost was shirt #2. I chose to purchase shirt #1 because I felt like the color matched my skin tone better and fit me better than shirt #2 did.

How does a nation decide what and how to produce?

To decide what and how to produce, economists use a tool known as a production possibilities curve. This curve helps a nation's economists determine the alternative ways of using that nation's resources.

Describe marginal costs and benefits.

To make good decisions on the margin, you must weigh marginal costs against marginal benefits. The marginal cost is the extra cost of adding one unit such as sleeping an extra hour or building one extra house. The marginal benefit is the extra benefit of adding the same unit. Once the marginal costs outweigh the marginal benefit, no more units can be added.

What are trade-offs?

Trade-offs are the alternatives that we give up when we make an economic decision. When we have to make decisions, we have to give something up in order to obtain the other alternative. All of the alternatives that we give up are trade-offs.

Why does every choice involve an opportunity cost and how do decision making grids help?

We always face an opportunity cost. When we select one alternative, we must sacrifice another. Using a decision-making grid can help you decide if you are willing to accept the opportunity cost of a choice you are about to make.

What is thinking on the margin?

When you decide how much or less to do, you are thinking on the margin. Deciding by thinking on the margin. Deciding by thinking on the margin involves comparing the opportunity costs and benefits. This decision-making process is called a cost/benefit analysis.

cost/benefit analysis

a decision-making process in which you compare what you will sacrifice and gain by a specific action

production possibilities curve

a graph that shows alternative ways to use an economy's productive resources

production possibilities frontier

a line on a production possibilities curve that shows the maximum possible output an economy can produce

entrepreneur

a person who decides how to combine resources to create goods and services

"guns or butter"

a phrase expressing the idea that a country that decides to produce more military goods ("guns") has fewer resources to produce consumer goods ("butter") and vice versa

shortage

a situation in which consumers want more of a good or service than producers are willing to make available at particular prices

Identify the factor of production represented by each of the following: (a) fishing waters, (b) an office building, (c) clerks in a store, (d) a tractor, (e) a student in a cooking school. Explain.

a. Fishing waters would be considered land because the water is a natural resource that provides fish for consumers. It comes from the Earth. b. An office building would be considered physical capital because it is a man-made object that is used to produce goods and services. c. Clerks in a store would be considered labor because they are workers who are using their effort to provide a good and service to other consumers. They complete a task and work in exchange for money to get paid. d. A tractor would be considered physical capital, because it is a man-made object that is used to help produce goods and services. e. A student in a cooking school would be considered human capital because they are acquiring the knowledge and skills to produce certain goods and services.

land

all natural resources used to produce goods and services

law of increasing costs

an economic principle that states that as production shifts from making one good or service to another, more and more resources are needed to increase production of the second good or service

capital

any human-made resource that is used to produce other goods and services

need

something essential for survival

want

something that people desire but that is not necessary for survival

services

the actions or activities that one person performs for another

trade-off

the alternatives that we give up when we choose one course of action over another

labor

the effort people devote to tasks for which they are paid

marginal benefit

the extra benefit of adding a unit

marginal cost

the extra cost of adding a unit

opportunity cost

the most desirable alternative given up as the result of a decision

goods

the physical objects that someone produces

scarcity

the principle that limited amounts of goods and services are available to meet unlimited wants

thinking at the margin

the process of deciding how much more or less to do

factors of production

the resources that are used to make goods and services

economics

the study of how people seek to satisfy their needs and wants by making choices

Underutilization

the use of fewer resources than an economy is capable of using

efficiency

the use of resources in such a way as to maximize the output of goods and services