ECON_2023 Fundamentals

"I love ice cream. But I've eaten so much ice cream today, I can't possible eat another cup."

The marginal benefit of eating ice cream is falling.

Allocation

The process of assigning a good, service, or resource to one use instead of another.

Increasing marginal cost

a condition in which the additional cost associated with each successive unit of an activity increases.

When you decide to turn off the bedroom light on your way to the kitchen so that you can save a little money on your electric bill, you are engaging in:

marginal decesion making

Economics

the study of how individuals and societies allocate scarce resources among many competing uses and how this decision-making affects the economy at large.

Whether a good or a service will be traded internationally depends largely on:

the terms associated with the trade.

Comparative advantage is the foundation for establishing the benefits of

trade

Individuals and countries specialize because the opportunity cost of producing goods and services:

varies

Clara can spend her afternoon doing one of three things: She can study economics, plant a sapling in her garden, or wash her car. Suppose she values spending time in the garden most; next her time washing the car; and her time studying economics the least. What is the opportunity cost of planting a garden?

washing her car

If you continue producing when marginal benefit is less than marginal cost, you are:

wasting resources that would be better spent elsewhere.

Combinations lying ____ the production possibilities frontier are possible but inefficient with the current resources and technology.

within

Economists use the phrase _____ to refer to the positive gains enjoyed by both buyers and sellers when they trade.

"trade creates wealth"

Land

All natural resources used in productions; sometimes referred to as "gifts of nature."

Labor

All physical and mental activity devoted to producing goods and services.

Resource

Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services.

relatively more scarce than

Drinkable water is ______ water in general.

ability is the ability and vision to combine land, labor, and capital into a productive process, taking on the risks and rewards that are inherent in any new venture. (Enter one word in the blank.)

Entrepreneurial

According to the circular flow diagram, which two groups interact in the resources market?

Households and firms

is a branch of economics that typically deals with how prices are determined in markets and how markets adjust to a variety of different events.

Microeconomics

The subject of economies can be divided into two main categories:

Microeconomics and Macroeconomics

If Alex engages in a mutually beneficial trade with another producer, where would his consumption point lie?

Outside the PPF

_____ in trade causes individuals and nations to become interdependent.

Specialization

Human capital

Suppose a firm spends $10,000 to train its employees on a new, company-wide software program that it has already purchased and intends to adopt in the following month. In this case, the knowledge gained through the training is considered:

Macroeconomics

The study of the economy at the large-scale level, examining total output, the price level, and other aggregate measures of the economy.

Microeconomics

The study of the economy at the small-scale level, examining individual and specific markets.

Entrepreneurial Ability

The talent or ability to combine land, labor, and capital to produce goods and services. It differes from human capital in that it primarily involves assuming risk and organizing resources into a productive process.

Capital

The tools, machinery, infrastructure, and knowledge used to produce goods and services. Capital is sometimes divided into "physical" and "human" capital.

Every person's and - ultimately - every economy's standard of living depends on the effective use of resources.

True

Micro

Typically deals with individual households and markets- such as the market for gasoline.

Which of the following help measure the quality of a good economic model?

Whether it gives us insights that can be used in the real world How well it reflects reality

Constant opportunity costs

a characteristic of production whereby the opportunity cost associated with increasing or decreasing the production of one good or service in terms of another is constant at every level of production.

Constant Opportunity Costs

a characteristic of production whereby the opportunity cost associated with increasing the production of one good or service, in terms of another, is constant at every level of production.

Scarcity

a condition that results from the inability of limited resources to satisfy unlimited wants.

Production possibilites frontier (PPF)

a graph that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology. the PPF shows the production combinations that are both attainable and efficient.

Circular Flow Model

a model that concisely describes how goods, services, resources, and money flow back and forth in an economy.

If an activity is performed where the marginal benefit is greater than the marginal cost (MB > MC), there is:

a net gain to the economy

Law of increasing opportunity cost

a principle in economics that holds that because some resources are better suited to producing one good or service than another as the production of a good or service increases, the opportunity cost of each additional unit rises.

A production possibilities frontier that illustrates a 1-for-1 trade off between goods is drawn as:

a straight, downward-sloping line.

Production possibilities schedule

a table that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology.

Land resources

all natural resources used in production are classified under the resource category

At a local town council, people debated a proposal that would change the use of public space for recreational use by demolishing a skating park and building an arboretum. This is known as the problem of:

allocating scarce resources.

Individuals and businesses must choose between the different uses for their available resources. This is called ______ resources and is due to the concept of ______.

allocating; scarcity

Efficient Allocation of Resources

allocation of resources in such a way that it is possible to increase the production of one good only by decreasing the production of another.

Inefficient Allocation of Resources

allocation of resources in such a way that it is possible to increase the production of one good without decreasing the production of another

The more of a good or a service that is consumed in a given period of time, the lower the marginal _____ that is associated with each additional unit.

benefit

For an entire economy, the production possibilities frontier is going to be:

bowed out because we have different resources with different opportunity costs.

A producer has a(n) _____ advantage in the production of a good or a service if his or her relative opportunity cost of production is lower than the opportunity cost of other producers.

comparative

As long as there are differences in opportunity costs, there are _____ advantages and there will be potential for trade to make both parties better off.

comparative

If you are ""relatively"" better at something, you have a(n) ____ advantage.

comparative

If you are relatively better at something, then you are said to have a(n) _____ advantage in that activity.

comparative

The producer with the lowest relative opportunity cost has a(n) _____ advantage and should specialize in the production of that good.

comparative

____ advantage is the foundation of establishing the benefits of trade.

comparative

The simple model of production assumes that the opportunity cost of production is:

constant

When production is characterized by ____ opportunity costs, the resulting production possibilities frontier will be a straight line.

constant

Specialization causes individuals and nations to rely on one another and increases the:

degree of interdependence between them.

On a production possibilities frontier (PPF) with Good X on the horizontal axis and Good Y on the vertical axis, we can say that the slope of the PPF (in absolute value) equals the opportunity cost of producing Good X with respect to the production of Good Y. This is true because the slope:

describes the trade-off resulting from the production of Good X in terms of Good Y.

The opportunity cost of producing a good for one producer may be different from that of another because of:

differences in available resources and technology.

The quality of a(n) ____ model can be measured by how well it reflects reality and whether it gives us insights that can be used in the real world.

economic

When resources are allocated in such a way that it is possible to increase the production of one good only by decreasing the production of another, then the allocation of resources is said to be

efficient

According to the circular flow diagram, a household receives a wage for supplying labor to a firm in the ____ market

factor

In the circular flow model, ____ must buy resources in order to produce the output they will sell to households.

firms

In the circular flow model, households and ___ interact in the resource market and the product market.

firms

In the two sector circular flow model, ________ must buy resources from _________ in order to produce the output they will sell to households.

firms; households

Martin has given himself an entertainment budget of $5 per week. He has decided that each week he will spend that $5 by either attending a matinee movie at his local theater or downloading five songs by one of his favorite artists. What is the non-monetary opportunity cost of seeing a movie this week?

five songs

Graphing the information in the production possibilities schedule produces the production possibilities:

frontier

When the producer of a good or service has a lower opportunity cost than other producers, that producer has an advantage in the market because:

he or she will be able to sell at a lower price than other producers.

If the price is too ____ producers will be eager to sell, but buyers will not be willing or able to buy.

high

In the circular flow model, _____ can obtain the income they need to buy the products they want to consume only by selling their resources.

households

The harm in specializing is that:

if the demand for the good or service you produce decreases, its price and your income will decrease too.

You are wasting resources that would be better spent elsewhere:

if you continue producing when marginal benefit is less than marginal cost.

As the amount of an activity increases, its marginal cost:

increases

In the real world, the opportunity cost of production ____ as production increases.

increases

The law of ____ opportunity cost says that because some resources are better suited to producing one good or service than another, as the production of a good or a service increases, ____ the cost of each additional unit rises.

increasing; opportunity

On a production possibilities frontier (PPF), if you are able to increase the production of both goods at the same time then, initially, resources were allocated

inefficient

Resources are also called:

inputs because they are transformed into output in the production process.

Human capital

knowledge and skills that people acquire in order to increase productivity

Suppose a farmer has three kinds of land for growing peaches; good - better - and best. As the farmer increases production - she will use the best land first - and costs will be low. At some point - she will run out of the best land and will have to start using the better land - and costs will be a little higher. This describes the:

law of increasing opportunity cost

Anytime the terms of trade change and move closer to someone's opportunity cost, that person is going to benefit ___ from trade than he or she did before.

less

Optimization behavior implies that if the marginal benefit of an activity is ______ ______ its marginal cost, you should not engage in that activity.

less than

For two parties to be willing to trade, the terms of trade must be:

less than the buyer's opportunity cost but greater than the seller's opportunity cost.

When the opportunity cost associated with increasing the production of one good or service in terms of another is constant at every level of production, then the production possibility frontier is:

linear

The additional benefit associated with one more unit of an activity is the _____ benefit.

marginal

The additional cost associated with one more unit of an activity is the ____ cost

marginal

An economy is better off when it stops producing output at the point where:

marginal benefit = marginal cost.

When you decide - after studying for three hours - that another hour of sleep is more beneficial to you than a fourth hour of studying, you are engaging in:

marginal decision making

Focusing production entirely on one good or service leaves you susceptible to changes in the

market

Each row of the production possibilities schedule illustrates the ____ amount of a good or a service that may be produced, given the production of the other.

maximum

Combinations outside of the production possibilities frontier are:

not currently possible to produce

As long as there are differences in ___ costs, there are comparative advantages and there will be potential for trade to make both parties better off.

opportunity

_____ cost is most plainly visible when spending more money on one thing means that less money can be spent on another thing.

opportunity

Consider a production possibilities frontier (PPF) with Good X on the horizontal axis and Good Y on the vertical axis. The slope of the PPF tells us the _____ of producing one additional unit of Good X.

opportunity cost

The value of the next-best forgone alternative is the

opportunity cost

Individuals and countries specialize because of differences in:

opportunity costs

When the marginal benefit equals the marginal cost, that stable level is referred to as an ____ level

optimal

When a decision maximizes overall benefit, it is called:

optimization

Combinations of production that fall inside the production possibilities frontier are ____ but not efficient.

possible

When people trade - producers can achieve something they can't without trade. Thus - only with trade is it

possible to operate outside the production possibilities frontier.

Comparative advantage refers to the ability to:

produce a good or service at a lower opportunity cost than others.

In the circular flow model, the two markets are the factor market and the:

product market

A graph that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology is the:

production possibilities frontier.

The production possibilities frontier, or curve, is a graphical representation of the

production possibilities schedule.

A useful way to visually represent the data in a production possibilities schedule is by means of a graph called a(n) ___ _____frontier.

production possibility

Self interest, marginal decisions, and optimization all form the basis of

rational decision making

According to the circular flow diagram, households and firms interact in the ______ and the ______.

resource market; product market

In the circular flow model, households can obtain the income they need to buy the products they want to consume only by selling their ____ also known as factors of production.

resources

The points on the production possibilities frontier show how we allocate our scarce ___ to the production of two different goods or services.

resources

_________ is/are also called factors of production since they are transformed into output during the production process.

resources

In the circular flow model, households _____ resources and _____ products.

sell; buy

The opportunity cost of producing a good or a service can be found by:

solving for the cost of one good in terms of another.

For an entire economy, the production possibilities frontier is going to be bowed out because:

some resources are better suited for producing some goods or services than others.

In the real world, the opportunity cost increases as production increases, because:

some resources are better suited for producing some goods or services than others.

When production is characterized by constant opportunity costs, the resulting production possibilities frontier will be a __ line.

straight

Physical capital

tangible items that are created to increase productivity.

Comparative advantage

the ability to produce a good or service at a lower relative opportunity cost than that of another producer.

Marginal benefit (MB)

the additional benefit associated with one more unit of an activity

Marginal cost (MC)

the additional cost associated with one more unit of activity

Gains from trade

the benefit, or wealth, that accrues to a buyer or seller as a result of trading one good, service, or resource for another. The wealth, or additional well-being, created by trade does not have to be monetary.

Relative scarcity

the comparison of the scarcity of one good, service, or resource to that of another.

Increasing marginal cost describes

the direct relationship between the marginal cost associated with the use of a good or a service and the quantity produced.

Self-interest

the idea that people choose to do the things that interest them

Optimization

the idea that people make choices in order to maximize the overall benefit, or utility, of an action subject to its cost; people will engage in an activity as long as the marginal benefit of an activity is greater than or equal to its marginal cost.

Decreasing marginal benefit describes:

the inverse relationship between the marginal benefit associated with the use of a good or a service and the quantity consumed.

Optimal level of output

the level of output at which the marginal benefit of the last unit produced and consumed in equal to the marginal cost of that unit.

Equilibrium occurs when:

the marginal benefit equals the marginal cost.

The optimal level of economic activity occurs when:

the marginal benefit equals the marginal cost.

Decreasing marginal benefit

the negative relationship between the marginal benefit associated with the use of a good or service and the quantity consumed; the more of a good or service that is consumed, in a given period of time, the lower the marginal benefit associated with each additional unit.

Specialization

the practice of using available resources to produce a single good or service rather than producing multiple goods or services.

Terms of Trade

the price of one good, service, or resource in terms of another.

Marginal decision making

the process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal cost of an action.

Opportunity Cost

the value of the next-best forgone alternative; the value of the opportunity that you gave up when you chose one activity, or opportunity, instead of another. Exists because of scarcity.

The marginal benefit of an activity can be found by calculating the change in:

total benefits as the level of the activity increases by one unit.