Economics – Module 1 – Flashcards
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What do economists mean by scarcity?
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They mean that unlimited wants exceed limited resources.
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Are food, time, gas, and workers considered scarce by economists?
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No
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Production Possibilities Frontier
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Shows the maximum attainable combinations of two goods that may be produced with available resources.
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How is economic efficiency shown?
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By points on the production possibilities frontier
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How is economic inefficiency shown?
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By points inside of the production possibilities frontier
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What will cause the Production Possibilities Frontier to shift outward?
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If technological advances occur
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Comparative Advantage
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The ability of an individual, firm, or a country to produce a good or service at a lower opportunity cost than competitors.
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What is the circular flow diagram and what does it illustrate?
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It shows how households and firms are linked through product and factor markets
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What are the two main categories of participants in markets?
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Firms and Households
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Which participants in markets are of greatest importance in determining what goods and services are produced?
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Households
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Capital refers to
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Goods used to produce other goods
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In a circular flow diagram showing how a market system works
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Income flows to firms through product markets
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The inputs used to make goods and services are called
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Factors of Production
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Scarcity is central to economics because it implies that
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Every choice involves an opportunity cost
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"The problem with economics is that it assumes that consumers and firms always make the correct decisions, but we know that everyone makes mistakes." What is meant by this?
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Economics assumes that consumers and firms are rational, not that they always make the right decisions.
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When economists develop models designed to explain the choices people make, they generally assume that
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People are rational
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Economists use the word marginal to mean extra or additional benefit or cost of a decision. An optimal decision occurs when
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Marginal benefits equal marginal costs
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What do economists mean by the word Marginal?
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extra or additional
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Economists believe that an activity should be continued up to the point where:
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The marginal benefit from the activity is equal to the marginal cost.
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What are the three economic questions every society must answer?
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1. What goods will be produced? 2. How will these goods be produced? 3. For whom will these goods be produced?
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Centrally planned economies allocate resources based on:
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Decisions made by Government
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Market economies answer three questions through:
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Decisions made by Houses & Firms
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Productive efficiency means that
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A good/service is produced at lowest possible cost
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Allocative efficiency means that
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Every good/service is produced up to the point where marginal benefit is equal to marginal cost
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Efficiency means that
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Goods are distributed in a way that maximizes benefits to society
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Equity means that
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Goods are distributed in a way that is fair
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Centrally planned economies seem to be less efficient because
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They don't give great incentives for hard work and innovation
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Relative to a market economy, a centrally planned economy would be expected to be:
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Better at neither productive or allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using low-cost methods
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Opportunity cost
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The highest valued alternative that must be given up to engage in activity
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Trade-offs force society to make choices, particularly when:
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Answering three questions: What to produce?, How?, For whom?
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In a market system, what determines how goods and services will be produced?
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Firms determine this.
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In a market system, how does society determine who will receive goods/services produced?
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Depends largely on how income is distributed
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How are economic resources allocated in a market economy?
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By the decisions of firms and households interacting in markets
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In a mixed economy, most economic decisions are made in markets, but the government plays a significant role in the allocation of resources. True or false.
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True
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When does productive efficiency occur?
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When a good/service is produced at the lowest possible cost.
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When does allocative efficiency occur?
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When production is in accordance with consumer preferences.
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What type of economic analysis is concerned with the way things ought to be?
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Normative analysis
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Economists use models to:
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To answer questions and analyze issues
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Economic data is used to:
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To test models
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Positive analysis is concerned with:
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What is
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Normative Analysis is concerned with:
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What ought to be
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Why are models based on assumptions?
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Models have to be simplified to be useful
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Macroeconomics
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Examines economy as a whole
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Microeconomics
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Examines individual markets
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Absolute Advantage
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Ability of individual, firm, or country to produce more of a good/service than competitors using same amount of resources
