Economics Chapter 1 Test

When do businesses make trade-offs?

-When they decide how to use their factors of production. -Example: a farmer who uses his or her land to plant broccoli can't use that same land to make squash.

production possibilities frontier

-a line on a production possibilities curve that shows the maximum possible output an economy can produce (most efficient level) -Each point on this line reflects a trade-off which are necessary because factors of production are scarce... using land, labor, and capital to make one product means that fewer resources are left to make something else.

Cost

-production possibilities curves can also be used to determine the opportunity costs involved in making an economic decision -Costs increases as production shifts from making one item to another

Thinking at the margin

-the process of deciding how much more or less to do -deciding by thinking on the margin involves comparing the opportunity costs and benefits (aka cost/benefit analysis)

Shortage

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

Labor

the effort people devote to tasks for which they are paid (medical care from a doctor, classroom instruction from a teacher, the creation of a painting by an artist, etc.)

Physical capital

the human-made objects used to create other goods and services (buildings, equipment, tools)

What idea does economics begin with?

the idea that people cannot have everything they need and want.

Human capital

the knowledge and skills a worker gains through education and experience (education, training, job experience)

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

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

Law of increasing costs

As we move along the curve, we trade off more and more for less and less output.

Decision-making on the margin

-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 issue

How does opportunity cost affect decision making?

-Every time we choose to do something, we give up the opportunity to do something else (sleeping in late means giving up studying 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 of something else

Why are goods and services scarce?

-Resources used to produce them are limited (scarce). -The amount of labor to produce them can be limited -Each resource may have alternative uses (individuals, businesses, and governments have to choose which alternative they want most)

Marginal cost

-The extra cost of adding a unit. -Example: sleeping an extra hour or building one extra house.

What are some things entrepreneurs do?

-They develop original ideas -Start businesses -Create new industries -Fuel economic growth Overall, they play a key role in turning scarce resources into goods and services

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

Growth

-When the production possibilities curve shifts to the right, this means the economy is growing. -Left means the economy is slowing down.

Decision-making grid

A graph-like form into which people may enter notations about the costs and benefits of various alternatives; used for assistance in making decisions.

Who makes trade-offs?

All individuals, businesses, and large groups of people.

Why is capital a key factor of production?

Because people and companies can use it to save a great deal of time and money... there's increased efficiency, knowledge, better time management, and increased productivity.

What are the three factors of production?

Land, labor, and capital

Marginal costs vs. marginal benefit

Once the marginal costs outweigh the marginal benefit, no more units can be added.

How does scarcity force people to make economic choices?

Scarcity forces all of us to make choices by making us decide which options are most important to us

Difference between shortages and scarcity

Shortages are temporary while scarcity always exists

Marginal benefit

The extra benefit of adding the same unit.

Production possibilities curve

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

What do trade-offs usually involve?

Things that can be easily be measured such as money, property, and time or things that cannot be easily measured, like enjoyment or job satisfaction.

Entrepreneur

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

"Guns or butter"

a phrase that refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods

How can we make the best economic choices?

We make the best economic choices when we take into account scarcity, opportunity costs, and looking at the production possibilities curve to decide how much to produce (if we are producers). Everything in economics involves trade-offs and we have to think hard before we decide what we think is the best decision. No matter what, though, we will always lose an opportunity when deciding on gaining another. When we decide we must look at the costs and benefits because everything is scarce- we can't have everything. Analyzing a PPC is also important for producers to decide how much to produce because it helps with efficiency.

When governments make trade-offs?

When they decide to spend their money on military needs instead of domestic ones, and vice versa.

Cost/ benefit analysis

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

Land

all natural resources used to produce goods and services (oil, coal, iron, water, forests, etc.)

law of increasing costs

an economic principle which 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's used to produce other goods and services

What is an entrepreneur's first task?

assemble the factors of production (land, labor, and capital)

Need

something essential for survival

Want

something that people desire but that isn't 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, to gain a greater benefit.

Why does every choice involve an opportunity cost?

we always face an opportunity cost. When we select one alternative, we must sacrifice another