Economics: Principles and Practices -
Unit 1 - Chapter 1-Questions and
Answers Graded A+
Scarcity - ANSWER-The fundamental economic problem of meeting people's virtually unlimited
wants with scarce resources.
Economics - ANSWER-A social science dealing with how people satisfty seemingly unlimited and
competing wants with the careful use of scarce resources.
Need - ANSWER-The basic requirement for survival, including food, clothing, and shelter.
Want - ANSWER-Something we would like to have but is not necessary for survival.
Factors of Production - ANSWER-The productive resources that make up the four categories of
land, capital, labor, and entrepreneurs.
Land - ANSWER-The natural resources or other "gifts of nature" not created by human effort.
Capital - ANSWER-The tools, equipment, and factories used in the production of goods and
services. Somtimes called *Capital Goods*
Labor - ANSWER-People with all their efforts, abilities and skills.
Entrepreneur - ANSWER-A risk-taking individual in search of profits.
Gross Domestic Product *(GDP)* - ANSWER-The dollar value of all final goods, services, and
structures produced withing a country's borders during a one-year period.
Good - ANSWER-A tangible economic product that is useful, relatively scarce, and transferable to
others.
Consumer Good - ANSWER-A good intended for final use by consumers rather that businesses.
Durable Good - ANSWER-A good that lasts for at least three years when used regularly.
Nondurable Good - ANSWER-A good that wears out or lasts for fewer that three years when used
regularly.
Service - ANSWER-The work or labor performed for someone.
Value - ANSWER-The monetary worth of a good or service as determined by the market.
Paradox of Value - ANSWER-The apparent contradiction between the high monetary value of a
nonessential item and the low value of an essential item.
Utility - ANSWER-The ability or capacity of a good or service to be useful and give satisfaction to
someone.
,Wealth - ANSWER-The sum of tangible economic goods thay are scarce, useful, and transferable
from one person to another such as money.
Market - ANSWER-A meeting place or mechanism that allows buyers and sellers to come together.
Factor Market - ANSWER-A market where the factors of production are bought and sold.
Product Market - ANSWER-A market where goods and services are bought and sold.
Economic Growth - ANSWER-The increase in a nation's total output of goods and services over
time.
Productivity - ANSWER-The measure of the amount of output produced with a given amount of
productive factors.
Human Capital - ANSWER-The sum of people's skills, abilities, health, knowledge and motivation.
Division of Labor - ANSWER-The division of work into a number of separate tasks to be performed
by different workers.
Specialization - ANSWER-Assignment of tasks to the workers, factories, regions, or nations that can
perform them more efficiently.
Economic Interdependence - ANSWER-The mutual dependency of one person's, firm's, or region's
economic activities on another's.
Trade-Off - ANSWER-The alternative that is available whenever a choice is to be made.
Opportunity Cost - ANSWER-The cost of the next-best alternative use of money, time, or resources
when making a choice.
Production Possibilities Frontier - ANSWER-A diagram representing the maximum combinations of
goods and/or services an economy can produce when all productive resources are fully employed.
Economic Model - ANSWER-A simplified version of a complex concept or behavior expressed in the
form of an equation, graph, or illustration.
Cost-Benefit Analysis - ANSWER-A way of thinking about a choice that compares the cost of an
action to its benefits.
Free Enterprise Economy - ANSWER-A market economy in which privately owned businesses have
the freedom to operate for a profit with limited government intervention.
Standard of Living - ANSWER-The quality of life based on ownership of necessities and luxuries that
make life easier.
What is economics? - ANSWER-The study of how society manages scarce resources
"people" make decisions to achieve objective given contrains
What do we mean by people - ANSWER-Individuals, Firms, Government
,What resources are scare? - ANSWER-Time, Income, Natural Resources, Labor
How do you measure a person's happiness? - ANSWER-Utility
What are consumer's constrained by? - ANSWER-Time, Money
What is the main objective of a firm? - ANSWER-Maximize profits
How are firms constrained? - ANSWER-Time, Labor, Machine, Capital
How are governments constrained? - ANSWER-Policy, Laws, Money
What is the main objective of a firm? - ANSWER-Make sure it's society is happy, healthy, safe, and
financially stable
concerned about the welfare of the people
Two types of economics - ANSWER-Positive Economics
Normative Economics
Positive Economics - ANSWER-What is...
Example: The development of fracking technology has resulted in an increase in the supply of oil
Normative Economics - ANSWER-What should be...
Example: We should restrict the use of fracking technology because of the risk of contaminating
ground water
Non opinion based
Principles #1
People face trade offs - ANSWER-
What is efficiency? - ANSWER-efficiency is the difference from equity and fairness
Efficient means using resources in the most productive way possible to produce the goods/services
people want
Efficient outcomes are not always fair
Markets tend to be efficient because they are based on voluntary exchange
- people choose to buy goods to maximize utility
firms choose to sell goods to maximize profit
Principles #2
The cost of something is what you give up to get it - ANSWER-
What is opportunity cost and the formula? - ANSWER-Value of what you give up
, Value of next best choice
Opportunity Cost = Explcit Cost - Implicit Cost
What is explicit cost - ANSWER-What you pya for something
What is implicit cost - ANSWER-A cost associate with something you're doing without money, for
example giving up sleep for class
Opportunity Cost - Application 1
What is the opportunity cost of attending college?
List the items you pay for each month - do they all count? Books, Tuition, Rent, Food, Gas, no not
everything cost because you would pay for food and gas with or without school
Is there anything else we should count?
Count things you are truly giving up, Opportunity Cost (The cost to obtain the opportunity)
Tuition, Textbooks, Parking Pass
Things you would buy anyways
Gas, Food, Clothes, etc. - ANSWER-
Opportunity Cost - Application 2
What's the difference between accounting profit and economic profit
Accounting profit = revenue - explicit cost
Economic profit = revenue - explicitly cost - implicit cost
Jane owns a restaurant
Revenue $200,000
Wages $50,000
Material Inputs $50,000
Rent, utilities, etc $40,000
Should she stay in business?
What if she has $100,000 worth of physical capital tied up in the business (current market value) and
the interest rate is 5%
She should stay in business, because if money is everything and she can't make more than $60,000,
she should stay in business because she makes $60,000 in profit - ANSWER-
Principle #3 - ANSWER-Rational people think at the margin
Decisions are made at the margin
What is rational behavior
Does rational always mean
making the best decision? - ANSWER-buyers/sellers are ration
no, Rational means using all available information when making decisions
