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Econ Unit 1
| Question | Answer |
|---|---|
| Needs | Things required for survival: food, water, shelter, and clothing. |
| Wants | Preferences that increase utility (satisfaction) through buying goods and services. |
| Utility | Economic term representing satisfaction or happiness. |
| Economic resources | Resources used to produce goods and services; also called factors of production or inputs. |
| Factors of production | Land, labor, capital, and entrepreneurship—the inputs used to produce goods and services. |
| Land | Natural resources or property used in production, such as land to build on or farm. |
| Labor | Human workers and work hours used in production. |
| Capital | Tools made to produce goods and services, such as factories, robots, wrenches, and computers. |
| Entrepreneurship | New ideas or ways of combining resources to produce goods and services. |
| Scarcity | The fundamental economic problem: resources are limited while needs and wants are unlimited. |
| Rivalrous | Describes a resource whose use by one person prevents it from being used by someone else. |
| Trade-off | The two or more alternatives/options faced because of scarcity. |
| Consumer goods | Goods used now by households. |
| Capital goods | Goods used by businesses to produce future output. |
| Durable good | A good intended to last for a relatively long period; your notes classify durable goods as 5+ years. |
| Non-durable good | A good that does not last as long; your notes classify non-durable goods as 0–5 years. |
| Production Possibilities Curve (PPC) | A model showing the maximum combinations of two goods that can be produced under the stated assumptions. |
| PPC assumptions | Two goods, efficient use and full employment of resources, fixed technology, and one snapshot in time. |
| Opportunity cost | The value or amount of the other product that must be given up to obtain more of the product being produced. |
| Opportunity cost on a PPC | The slope of the PPC when the good being increased is on the horizontal axis, or the reciprocal of the slope when the good being increased is on the vertical axis. |
| Constant opportunity cost | Opportunity cost stays the same as production changes; represented by a straight-line PPC. |
| Increasing opportunity cost | Opportunity cost rises as more of a good is produced; represented by a bowed-out PPC. |
| Productive efficiency | Using resources fully and efficiently; represented by points on the PPC. |
| Inefficiency | A production combination inside the PPC, meaning resources are not being fully or efficiently used. |
| Currently unattainable | A production combination outside the current PPC that cannot be produced with current resources and technology. |
| Economic growth | An increase in productive capacity, shown by an outward expansion/shift of the PPC. |
| Absolute advantage | The ability to produce more output using the same resources than another producer. |
| Comparative advantage | The ability to produce a good or service at a lower opportunity cost than another producer. |
| Specialization | A method of production in which an entity focuses on a limited scope of goods to gain greater efficiency. |
| Gains from trade | The additional output/consumption made possible when producers specialize according to comparative advantage and trade. |
| Terms of trade | The rate at which one good is exchanged for another in trade. |
| Opportunity cost ratio | The production cost or 'price' of a good measured by the amount of the other good that must be given up; on a straight PPC, this is related to the slope. |
| Resource endowments | The resources available to a country or producer. |
| Cost-benefit analysis | A decision-making method that compares benefits and costs to maximize total net benefit. |
| Total benefit | The total benefit or satisfaction received from a choice. |
| Total cost | The total cost associated with a choice. |
| Net benefit | Total benefit minus total cost. |
| Marginal benefit (MB) | The additional benefit from one more unit or choice. |
| Marginal cost (MC) | The additional cost from one more unit or choice. |
| Utility-maximizing decision rule | Choose the option where total net benefit is greatest; equivalently, where MB = MC. |
| Economic cost | The payment that must be made to obtain and retain the services of a resource; includes both explicit and implicit costs. |
| Explicit cost | A monetary payment made to a supplier. |
| Implicit cost | The opportunity cost of using a self-owned resource in one manner rather than its next-best alternative. |
| Self-owned resource | A resource owned by the firm/person whose next-best alternative use creates an implicit cost. |
| Normal profit | The next-best income from entrepreneurial ability; treated as an implicit cost. |
| Revenue | The money a firm brings in from selling a good or service. |
| Revenue formula | Price × Quantity. |
| Economic profit | Revenue minus explicit costs minus implicit costs. |
| Marginal utility (MU) | The incremental increase in utility that results from consuming one additional unit. |
| Law of diminishing marginal utility | As consumption increases, the marginal utility derived from each additional unit declines, all else equal. |
| Consumer utility maximization | Allocating income so that the last dollar spent on each product yields the same amount of extra marginal utility. |
| Marginal utility per dollar | Marginal utility divided by the price of the product, MU/P. |
| Utility maximization equation | MU of Product A / Price of A = MU of Product B / Price of B. |
| What is the fundamental problem of economics? | Scarcity: resources are limited while needs and wants are unlimited. |
| Why does scarcity create trade-offs? | Because limited resources cannot be used for every possible alternative, so choosing one option means giving up another. |
| What is opportunity cost? | The value of the next-best alternative given up when a choice is made. |
| How do you calculate opportunity cost? | Amount given up ÷ amount gained. |
| What does a point on the PPC represent? | A combination of two goods that uses resources fully and efficiently. |
| What does a point inside the PPC represent? | An attainable but inefficient combination because resources are not fully or efficiently used. |
| What does a point outside the PPC represent? | A currently unattainable combination given current resources and technology. |
| What does a straight-line PPC indicate? | Constant opportunity cost. |
| What does a bowed-out PPC indicate? | Increasing opportunity cost. |
| Why does a bowed-out PPC have increasing opportunity cost? | Resources are not equally suited to producing both goods, so producing more of one good requires giving up increasingly larger amounts of the other. |
| What causes an outward PPC shift? | An increase in productive capacity, such as more resources or improved technology. |
| What causes an inward PPC shift? | A decrease in productive capacity, such as a loss of resources. |
| What is the difference between absolute and comparative advantage? | Absolute advantage is producing more with the same resources; comparative advantage is producing at a lower opportunity cost. |
| Which advantage determines specialization? | Comparative advantage. |
| How do you determine comparative advantage? | Calculate each producer's opportunity cost and identify who has the lower opportunity cost for each good. |
| Why can trade benefit both countries? | Specialization based on comparative advantage allows resources to be used more efficiently and can increase total world output. |
| What determines mutually beneficial terms of trade? | The trade rate must fall between the countries' opportunity costs for the good being traded. |
| What is specialization? | Focusing production on a limited range of goods to increase efficiency. |
| What is the economic decision rule for cost-benefit analysis? | Choose the quantity where total net benefit is greatest, equivalently where MB = MC. |
| What should you do when MB > MC? | Increase the activity because the additional benefit exceeds the additional cost. |
| What should you do when MC > MB? | Do not choose the additional unit because the additional cost exceeds the additional benefit. |
| What is the difference between explicit and implicit costs? | Explicit costs are actual monetary payments; implicit costs are opportunity costs of self-owned resources. |
| Why is an owner's forgone salary an implicit cost? | The owner gives up the opportunity to earn that income by working elsewhere. |
| What is economic profit? | Revenue minus both explicit and implicit costs. |
| What is the law of diminishing marginal utility? | As consumption increases, the marginal utility from each additional unit declines, all else equal. |
| How is marginal utility calculated? | Change in total utility ÷ change in quantity consumed. |
| What is the utility-maximizing rule for multiple products? | The last dollar spent on each product should yield the same marginal utility. |
| What happens if MU/P is higher for Product A than Product B? | A consumer can increase utility by shifting spending toward A and away from B, subject to the budget constraint. |
| What does MU/P mean? | Marginal utility per dollar spent on a product. |
| Why does MB generally decline for consumption decisions? | Because marginal utility declines as additional units are consumed. |
| What is allocative efficiency in the context of the notes? | A situation in which society gets more output/satisfaction from the available scarce resources. |
| What is productive efficiency? | Producing at a point on the PPC using resources fully and efficiently. |
| Why are capital goods different from consumer goods? | Capital goods are used by businesses to produce future output, while consumer goods are used by households now. |
| Is money a factor of production called capital? | No. In this model, capital means physical tools used to produce goods and services. |
Created by:
katdolan