Basic Concepts: Scarcity & Systems
The fundamental problem in economics that arises because human wants are unlimited but resources are scarce.
What is scarcity?
This is the next best alternative that you give up when you make a choice.
What is opportunity cost?
The ability to produce more of a good or service than competitors, using the same amount of resources.
What is absolute advantage?
This is the economic concept that states a consumer's satisfaction from consuming an additional unit of a good decreases as they consume more of it.
What is the Law of Diminishing Marginal Utility?
The demand is considered this if the percentage change in quantity demanded is less than the percentage change in price, resulting in a number less than one.
What is inelastic?
The four factors of production, which are the resources used to produce all goods and services.
What are land, labor, capital, and entrepreneurship?
A point located inside the Production Possibilities Curve (PPC) represents this condition.
What is inefficiency or underutilization of resources?
The ability to produce a good or service at a lower opportunity cost than competitors.
What is comparative advantage?
For a rational consumer to maximize their utility, the ratio of marginal utility to price must be equal for all goods consumed. This is known as the...
What is the Utility Maximization Rule?
If the price of a product increases and the firm's total revenue decreases, the demand for that product is this.
What is elastic?
In this type of economic system, the government owns the resources and answers the basic economic questions of "What to produce?" "How to produce?" and "For whom to produce?".
What is a command economy?
An outward shift of the entire Production Possibilities Curve (PPC) is known as this, and it is caused by an increase in resources or technology.
What is economic growth?
Output Problem: Country A can produce 10 shoes or 5 shirts. Country B can produce 8 shoes or 2 shirts. Country A's opportunity cost for 1 shoe is this.
What is 5/10 or 1/2 of a shirt? (Calculation: 10 shoes:5 shirts or 5shirts/10shoes=0.5 shirt per shoe)
A consumer buys two goods, X and Y. The marginal utility of Good X is 20 utils and its price is $4. The price of Good Y is $2. To maximize utility, the marginal utility of Good Y must be this.
What is 10 utils? (Calculation: MUx=MUy⟹ MUx/Px=20/4=5. So, MUy/Py=5⟹2*MUY=5⟹MUY=10)
A good for which the income elasticity of demand is negative.
What is an inferior good?
An economic model illustrating the maximum combinations of two goods that can be produced with a given amount of resources and technology.
What is the Production Possibilities Curve
When a PPC is bowed outward (concave) from the origin, it illustrates this economic principle.
What is the Law of Increasing Opportunity Cost?
Input Problem: It takes Country X 2 hours to produce 1 widget and 4 hours to produce 1 gadget. It takes Country Y 5 hours for 1 widget and 10 hours for 1 gadget. This country has the comparative advantage in producing gadgets.
What is neither? (Explanation: The opportunity cost for 1 gadget is 2 widgets for both Country X (4/2=2) and Country Y (10/5=2). Since opportunity costs are equal, there is no basis for mutually beneficial trade.)
The primary reason the demand curve slopes downward is this economic principle, stating that as the price of a good falls, consumers will substitute this good for other now relatively more expensive goods.
What is the Substitution Effect?
If the price of Good A increases from $10 to $15, and the quantity demanded of Good B decreases from 100 units to 50 units, the cross-price elasticity of demand is this.
What is -1.67?
This term refers to the goods used to produce other goods and services, such as machines, tools, and factory buildings.
What is capital?
A table shows the OC of Good A is constant at 3 units of Good B. The PPC for these two goods must be this shape.
What is a straight line?
Assume a world price for a good falls below a nation's domestic price. The nation will become an importer of the good and its domestic consumers will be this.
What is better off (or gain from trade)?
A consumer's utility is maximized when their entire budget is spent, and the ratios of marginal utility to price for the last unit of all goods are equal. This statement encompasses the two key assumptions of this.
What is Utility Maximization Rule?
If the price elasticity of demand for a good is 2.5, and the price is currently $10, the quantity demanded is 50 units. If the price decreases by 10%, the new quantity demanded will be this.
What is 62.5 units? (Calculation: ED=2.5. 2.5=%ΔQD/10%⟹%ΔQD=25%. The new quantity is 50+(50×0.25)=62.5 units)