Economics Unit 1 Review

What are the 3 fundamental economic questions? What does answering these establish?

1 - What will be produced and how much? 2 - How will it be produced? 3 - For whom will it be produced? Answering these 3 questions establishes an economic system for a society

Where are each of the 3 fundamental economic questions answered in the Circular Flow Model? Explain your reasoning for each.

1) What will be produced and in what quantity? - Answered in the Product Market - Consumers make their choices in this market - Suppliers see what is being bought and then determine and how much of which good/service will be produced 2) How will it be produced? - Answered in the Resource Market - In order for firms to maximize profits, they must choose the least costly method of production which is determined by productivity and cost 3) For whom will it be produced? - Answered in both markets - Households that have more valuable factors of production to sell in the resource market will receive more income and will spend more money than households with a lower income

What 2 things can cause the production possibility curve to expand outward?

1. Increased technology, 2. Newly found resources

Give 3 negative effects of government regulations on businesses.

1. They cut into company profits 2. They stifle competition 3. They cause higher prices for consumers

Describe what "guns and butter" means in an economic sense.

A concept shown using the PPC model...it alludes to the idea that a society must decide what combination of consumer goods and military goods should be produced at any 1 time.

Who believed the free market was the best economic system? What concept did he embrace that basically means "let us be".

Adam Smith; Laissez Faire

Why is it that people in a Mixed Market Economy are not compensated equally?

Everyone has different amounts of limited resources to sell. Those who have more resources to sell or have more valuable resources to sell will be compensated more than those who do not have as many resources to sell or have less valuable resources to sell.

T/F - Entrepreneurs would have the most freedom in opening and running a business in a socialist economic system.

F - Entrepreneurs would have the most freedom in opening and running a business in a FREE MARKET economic system.

T / F - An efficient economy is one that makes the best use of the goods and services it produces.

False for 2 reasons...1 - an efficient economy is one that its resources to produce the most goods and services; 2 - "best use" is a subjective statement, there is no universally accepted idea of what the best use of goods/services is.

A traditional economic system is on that _________

Follows traditions, cultural norms and what has allows been done to decide what will be produced, how it will be produced and for whom it will be produced.

How do goods differ from services?

Goods are objects you can buy; services are work you can buy

What is the government's role in controlling externalities in the American economy?

Government tries to encourage positive externalities and limit negative externalities

How does entrepreneurship relate to the other 3 scarce resources?

It is entrepreneurship that brings the other 3 scarce resources together to create a desirable good/service

Based on the Circular Flow Model, why are Household considered both buyers and sellers?

Households sell their scarce resources to business firms and buy finished goods from business firms.

What does the production possibilities curve model show? What does the production possibilities frontier show?:

PPC: All the alternative ways a society can use their resources to produce goods/services. PPF: The maximum amount of any 2 goods a society can produce.

Give an example of a positive externality & a negative externality.

Positive - medical research leading to a cure for cancer Negative - airplane noise heard by those who live near an airport

Describe the transactions that occur in the product market and resource market in the Circular Flow Model?

Product Market - Spending Money for Final Goods and Services Resource Market - Revenue for Scarce Resources

Some Americans want government to intervene in their free enterprise economy in order to ________________.

Protect the public interest.

How does scarcity force us to make choices? How does scarcity create competition?

Scarcity forces us to make choices because we do not have enough resources to produce all the goods/services in the amounts that are desired so people must choose which goods/services we value more. Scarcity creates competition because people will work to gain whatever rationing device(s) is/are used to distribute scarce resources and final goods/services.

What makes all goods/services scarce?

The fact that all goods/services are made from scarce resources.

How do we know that a good/service/resource is scarce?

We know this when there is a price attached to the good/service/resource

Provide 2 examples of each of the following scarce resources:

a. Land: water, oil b. Labor: a person's time used to work as a waiter; the effort put in by a plumber to install a garbage disposal c. Human Capital: a taxi driver's knowledge of the streets he drives on; an engineer's understanding of how a building has to be built d. Physical Capital: a factory building; a hammer e. Entrepreneurship: starting & running a service that hires people to install sprinkler systems in lawn; thinking of and producing a new gaming system

The government issues patents and copyrights in order to _______.

promote innovation by providing inventors and entrepreneurs the means of protecting their ideas, goods & services.

The motivating force in a free market is __________. The motivating force for producers is ____________.

self-interested behavior; profit