D089 Principles of Economics 2021 Study Guide Questions and Answers

1. What are the three fundamental questions every economy must answer? Give an example of a “What” question. What to produce, how it will be produced, and for whom the goods or services are produced. What to produce example: What to produce to feed farm animals? 2. What do economists mean when they say that people “think at the margin”? People will think about what the next step or additional action means for them. (Principle 3) 3. According to the 10 Principles of Economics, what determines a nation’s standard of living? The standard of living for a nation is determined by its ability to produce goods and services. (The more productive a society, the better its people live.) (Principle 8) 4. Using the 10 Principles of Economics, explain why trade is beneficial? Trade can leave everyone in a better position. It allows people to concentrate on what they do best and exchange their ability with others to supplement their own needs. (Principle 5) 5. How does printing money impact prices? Printing too much money causes prices to rise. Consistently rising prices for goods and services results in inflation. The more a government prints money, the less the money is worth, thus making goods and services more expensive. (Principle 9) 6. What are the differences between the Traditional and the Market economy? In a Traditional Economy, individuals make decisions based on traditions, beliefs, and customs. In a Market Economy, businesses make decisions based on consumer demand. 7. Identify two disadvantages of a Command economy? Rationing commonly occurs due to poor planning and an inability to meet societal demands. People are discouraged from innovating and are required to follow orders and keep with the central plan. 8. Explain one of the advantages of the Mixed economy? Goods and services are distributed to where they are needed the most: therefore, prices are set by supply and demand. 9. How are macroeconomics and microeconomics different? Microeconomics is about the individuals’ decisions and how they affect the economy where macroeconomics looks at the broader issues in the economy. 10. Give an example of a normative statement. Milk should be $6.00 a gallon so that dairy farmers may have a higher standard of living. 11. Identify the payment that goes to each of the four factors of production. Natural resources: rent for land and buildings. Labor: wages and salaries for labor Capital: interest and dividends for the use of financial capital (Loans and equity investments) Entrepreneur: profit for entrepreneurship 12. What does the circular flow diagram depict? A circular flow diagram depicts the flow of money and goods through the economy between firms and households). Module 2 – The Economic Problem 1. Why is the concept of scarcity so important in economics? There will never be enough resources to meet everyone’s needs. 2. What does an individual’s budget constraint identify? It identifies what is affordable within your discretionary income when looking at possible purchase combination options of two different items. 3. Identify two ways in which the budget constraint and the PPF are similar and two ways in which they are different. Both are similar in that they both assume that resources and technology are fixed. A difference between budget constraint and PPF are that budget constraints are used by individuals and PPF is used by firms. 4. Using the graph below, explain the trade-off associated with a movement from Point A to Point B.