Economics Unit 1 Questions And Answers

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economics
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the study of choice under conditions of scarcity – the study of how individuals, families, businesses, and governments use limited resources to fill unlimited wants
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scarcity
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exists if we desire more of something than we can have – an economic problem that results from unlimited wants and limited resources
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time and money
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each of us must deal with this form of scarcity
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shortages are temporary Scarcity relates to entire natural resource and when it runs out
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what is the difference between shortage and scarcity
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tradeoff
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whenever the scarcity of money or time forces you to make a choice – when you give up one thing to get something else
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how people respond to trade offs
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what are economists interested in
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opportunity cost
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the value of the next-best alternative given up when that choice is made – captures the full trade off involved in a choice – whatever you must give up for a choice
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society
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any collection of people who share a common bond, such as those living in the same city or country
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scarcity
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tradeoffs from society arise from…
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needs
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minimal requirements of things such as food, water, and shelter that are necessary for survival
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wants
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the things that are desired but not essential to life
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economy
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a system for coordinating the production and distribution of goods and services
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goods
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physical items produced in an economy – tangible things that can be seen, felt, or touched – produced through scarce resources and satisfy human wants
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services
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activities produced in an economy – intangible things that use scarce resources to satisfy human wants
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opportunity cost
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because of scarcity and trade offs, we are going to face..
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opportunity cost
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the opinion you would have taken, had you not taken the choice you did
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factor of production
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land, labor, capital, and entrepreneurship – the resources necessary to produce goods and services
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input, output
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resources are the __ , production is the ___
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land
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natural resources
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labor
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human resources
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physical capital
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manufactured goods used to make other goods
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human capital
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knowledge, education skills
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entreperneurship
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the people who start new businesses, create new products or processes, or people who improve management techniques
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goods and services
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the production or output is made of…
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inside the country and between the countries
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where does the allocation of resources happen
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trade
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a willing exchange of goods and services for mutual gain – this allocation of goods/services makes both people better off
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model
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a simplified representation of reality that explains how you can divide your scarce resources among the different types of production – used because economics is a social science and is the easiest way to see human behavior because human interaction is very complex
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it deals with human interactions
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why is economics a part of a social science
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PPF (production possibility frontier)
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a curve that shows the maximum quantity of one good that can be produced for each possible quantity of another good produced –
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possibilities
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on a PPF, what are the points on the curve representative of
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frontier
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on a PPF, what is the curve representative of
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quantity of x and y that can be made using all available resources
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what do the unlabeled points between the labeled points represent in a PPF
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frontier
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represents a border between what the country can produce and what it cannot produce using the available resources
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unattainable – not enough resources available to produce the combo of goods that the point represents
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what is a point outside of PPF represent
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the law of increasing opportunity cost
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the tendency for the opportunity cost of a good to rise as more of the good is produced – some resources are better suited for one type of production than for another
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if the country takes every opportunity to make some people better off without making other people worse off – the country is getting the most out of its available resources
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when is the economy of a country efficient
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production is inefficient
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any point that lies below the PPF means that…
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Idle resources
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resources that could be used to make some good or service but are not being used to produce anything – causes a country to operate below PPF – opportunity cost of production does not apply here
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by putting resources to use
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how can one produce more goods and services under idle resources
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inefficient resources
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the country might be using all of its resources but not in a productive way
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economic growth
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an increase in the ability to produce goods and services over time – common goal because it enables a country to produce more goods and services and does a better job at satisfying the needs and wants of its citizens
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increase in resources and the discovery of new ways to produce goods and services using fewer resources
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what are two sources of economic growth
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extra benefits and extra costs (marginal)
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includes implicit costs, so making decisions by merely considering the flow of funds into and out of your wallet will lead to decisions that fail to maximize your satisfaction
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you can measure the number of dollars coming into wallet versus number flowing out
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what happens when you base decisions on explicit costs only
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explicit cost
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out of pocket cost
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implicit costs
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all other factors of cost
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inflation
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if wage goes up, the cost of everything else goes up because the wage is a price – would cause a shortage of labor
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incentive will backfire
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why does good intention not work
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what should be produced, how should it be produced, for whom should it be produced
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the three basic economic questions
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microeconomics and macroeconomics
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economics is divided into two major areas
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microeconomics
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the study of how people make decisions and how those decisions affect others in the country – ex. how many hours should you work for pay each week? Is college a good investment?
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macroeconomics
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the study of the economy as a whole – includes the ups and downs of the economy and the interactions between its various parts – ex. why do the prices of goods and services tend to rise over time? what effect does government borrowing have on economy?
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positive economics
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the study of what the world is like and why it works the way it does – facts about cause and effect relationships – allows predictions to be made which helps individuals, businesses, and governments plan for the future – ex. how many teenagers live in poverty? do people buy more or less coke when their incomes increase?
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normative economics
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the study of the way things should be rather than the way things are – brings opinions and ideals into the process of answering questions – ex. should our country do more to help the poor? should college athletes be paid?
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positive economics focuses on how things are actually today where as normative economics focuses on the way things should be
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what is the difference between positive and normative economics
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milton friedman
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considered one of the most influential economists of the twentieth century – theorized that money supply and prices are directly linked – suggested that the federal reserve needed to regulate the money supply in order to prevent price inflation – strong advocate for the free-market economy – promoted negative income tax – wants economic freedom at all costs
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adam smith
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saw economic behavior as guided mainly by the force of self-interest – viewed the economy as a system in which regular patterns emerged from people buying and selling in markets – stressed that people should be free to make decisions without meddling from the government or other outside forces
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invisible hand
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even when people act from selfish moves, the market encourages them to make the kind of selfish decisions that will benefit others
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economic growth, efficiency, equity, economic security, economic freedom
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five goals of the economic system
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economic growth
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measured by the GDP, if you take GPD and divide it by country, you will have the GDP per capita (standard of living), capitalist is good at this goal
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efficienvy
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depends on how the three basic economic questions are answered – considered the well being of everyone
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equity
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some people believe in equality of outcome – some believe in equality of opportunity – U.S. looks more frequently at equality of outcome instead of opportunity
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equality of opportunity
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everyone in society should have the same opportunity in life
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economic security
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people need a safety net
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economic freeedom
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people can make economic decisions for themselves – people who prefer to live in a country where they are free to choose
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traditional economy
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no government – no ownership of property – no individual, belongs to group, everything in common – every one has a share in the distribution of income – social approval or you’re kicked out
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command economy
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government very important – yes incentive, if you don’t do what government says, you do to prison – government controls resources – goal of equal distribution of income where everyone has a share
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market economy
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government has no role (wants trading) – profit is an incentive (it’s good to be selfish, adam smith) – inequality of distribution of income
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mixed ecnomy
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protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims. According to neoclassical theory, mixed economies are less efficient – capitalism + socialism

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