Economics Chapter 1 & 2 Study Guide – Flashcards

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question
What is the difference between a physical and a psychological want? Be able to provide an example of each. a. Physical want b. Psychological want
answer
a. Physical wants are things you need to live; ex-food,shelter b. Psychological wants are the things that aren't necessary for survival like a new phone and new clothes
question
Scarcity exists with every business, household, and government. a. Explain the term scarcity b. What makes an item limited but not scarce?
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a. Scarcity means that an inequality exists between wants and resources available to satisfy them b. Limited means there's a small quantity for an item, but there's not a lot of demand.
question
An opportunity cost exists because of scarcity. Explain the term opportunity cost and give an example of an opportunity cost. Be sure to understand the relationship between scarcity and opportunity cost.
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Opportunity cost is the highest valued alternative given up as the result of making a choice. (Example: Farmer gives up corn to grow soybeans)
question
You will have questions on the production possibility frontier. a. Explain what a Production Possibility Frontier shows us. b. Be sure you can compute opportunity cost based on a provided graph. (Leave answer b. blank) c. Be able to identify and explain "inefficient" and "impossible" scenarios.
answer
a. The range of possibilities you have with the resources you have. b. c. Inefficient is within the PPF but not using all resources available; Impossible is outside the PPF because you are exceeding the amount of resources you have
question
What are the three economic questions that all economic societies must answer? Be sure you know the FULL QUESTION.
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a. What goods and services to produce? b. How should goods and services be produced? c. For whom will goods and services be produced?
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Explain the following economic systems: a. Pure market system b. Traditional system c. Command system d. Mixed system
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a. Pure market system: No government involvement, people in their economic roles free to make choices b. Traditional system: rely on traditions/customs to make the what, how, and for whom choices c. Command system: government issues commands to make the what, how, and for whom choices. Controls most property rights. d. Mixed system: may emphasize private ownership and voluntary exchange, but allow government to play an important role.
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What are the three factors of production? Give examples for each.
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a. Natural resources- wheat, water b. Human resources- farmer, construction worker c. Capital resources- truck delivers gasoline
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What are the three functions of money? Explain those functions.
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a. Medium of exchange: trade labor for money. The money is like a coupon indicating you owed a specific portion of the goods and services offered in this economy. b. Store of value: hold on to it to use sometime in the future c. Measure of value: indicates the relative value of products/services
question
Explain the concept of bartering.
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Bartering is an exchange of goods and services without using money
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Explain the profit motive.
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If the business doesn't make a profit over time, the business can't operate. Causes business to try to pay lowest possible prices for the resources it uses and to sell its products at highest possible prices. (Profit= Total Sales > Total Costs)
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Explain why the U.S. economy is considered a mixed economy.
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Markets make most economic decisions, government plays an important role and steps in when need be.
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Explain why specialization leads to voluntary exchange.
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People must buy and sell products to acquire all the things they want from the economy because they don't have the time and resources to produce everything themselves.
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List and explain the 6 pillars of the free enterprise system.
answer
a. Private Property: resources and products owned by individuals or businesses b. Specialization: a process in which businesses and people focus on producing one/few parts of an entire product c. Voluntary Exchange: d. Price System: uses monetary prices as a message system to facilitate exchanges between buyers and sellers e. Market Competition: Competition among businesses f. Entrepreneurship: the motivation that drives business leaders to compete and react to changing conditions in the market.
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