ECON 2020 WEEK 4 EXAM QUESTIONS
WITH DETAILED VERIFIED ANSWERS
Four Properties of Trade
1. Trade helps both sides
2. Trade creates value
3. Trade is a positive sum game
4. Trade encourages diverse interactions
Unconstrained Vision of Economics
Presupposes that we have sufficient resources to satisfy all wants and needs, you don't have to
choose
Constrained Vision of Economics
We have limited resources, but unlimited wants and desires
Scarcity
When economic resources are limited, economics start with constrained visions (we can only
satisfy some wants and desires
Resources, labor, capital
Scarcity → Choices → Tradeoffs → Opportunity Cost → Incentives (Incentives affect
behavior**)→ Behavior
Production Possibilities Frontier
- Output of two things on each axis
- Can produce on what is in or on the frontier, not what is outside
- Illustrates tradeoffs, scarcity, and opportunity cost → higher opportunity cost leads to increased
trade-off
Three Fundamental Questions of Production
,1. What will be produced?
2. How will it be produced?
3. For whom will it be produced
Law of Demand
All else equal, quantity demanded falls when price rises and rises when price falls
Incentives affect behavior
Foundations of Economics: Incentives
Motives for people to act or exert effort, people will make the choice that will most improve their
situation
Can be: positive or negative, direct or indirect
Foundations of Economics: Trade-offs
Choosing to do one thing preventing you from going another
Foundations of Economics: Opportunity Cost
Quantifies what and how much is being given up, highest valued alternative must be be
sacrificed to get something else
Foundations of Economics: Marginal Thinking
What is worth what you are giving up, whether the benefit of one more unit of something is
greater than its cost
First Two Rotunda Principles
1. Trade creates value
2. Incentives affect behavior
Comparative Advantage
The situation an individual, business, or country can produce at a lower opprotunity cost than a
competitor can: power of specialization
, Circular Flow
Shows how goods, services, and resources flow through the economy via commerce between
households (consumers) and firms (businesses)
Macroeconomics
Study of the overall aspects and workings of an economy, such as inflation, growth,
employment, interest rates, and the productivity of the economy
Positive Analysis
A positive statement the can be tested and validated: "what is"
Normative Statement
Cannot be empirically tested or validated: "what ought to be"
Endogenous Factors
Factors we have accounted for
Exogenous Factors
Factors beyond our control
Law of Increasing Opportunity Cost
Opportunity cost of producing a good rises as a society produces more of it
Time Trade-Off: Short Run
Decisions that reflect our immediate or short-term wants, needs, or limitations (partially adjust
behavior)
Time Trade-Off: Long Run
Make decisions that reflect our wants, needs, and limitation over long run (consumers have time
to fully adjust to market conditions)
Market Economy
Resources allocated among households and firms with little or no government interference
WITH DETAILED VERIFIED ANSWERS
Four Properties of Trade
1. Trade helps both sides
2. Trade creates value
3. Trade is a positive sum game
4. Trade encourages diverse interactions
Unconstrained Vision of Economics
Presupposes that we have sufficient resources to satisfy all wants and needs, you don't have to
choose
Constrained Vision of Economics
We have limited resources, but unlimited wants and desires
Scarcity
When economic resources are limited, economics start with constrained visions (we can only
satisfy some wants and desires
Resources, labor, capital
Scarcity → Choices → Tradeoffs → Opportunity Cost → Incentives (Incentives affect
behavior**)→ Behavior
Production Possibilities Frontier
- Output of two things on each axis
- Can produce on what is in or on the frontier, not what is outside
- Illustrates tradeoffs, scarcity, and opportunity cost → higher opportunity cost leads to increased
trade-off
Three Fundamental Questions of Production
,1. What will be produced?
2. How will it be produced?
3. For whom will it be produced
Law of Demand
All else equal, quantity demanded falls when price rises and rises when price falls
Incentives affect behavior
Foundations of Economics: Incentives
Motives for people to act or exert effort, people will make the choice that will most improve their
situation
Can be: positive or negative, direct or indirect
Foundations of Economics: Trade-offs
Choosing to do one thing preventing you from going another
Foundations of Economics: Opportunity Cost
Quantifies what and how much is being given up, highest valued alternative must be be
sacrificed to get something else
Foundations of Economics: Marginal Thinking
What is worth what you are giving up, whether the benefit of one more unit of something is
greater than its cost
First Two Rotunda Principles
1. Trade creates value
2. Incentives affect behavior
Comparative Advantage
The situation an individual, business, or country can produce at a lower opprotunity cost than a
competitor can: power of specialization
, Circular Flow
Shows how goods, services, and resources flow through the economy via commerce between
households (consumers) and firms (businesses)
Macroeconomics
Study of the overall aspects and workings of an economy, such as inflation, growth,
employment, interest rates, and the productivity of the economy
Positive Analysis
A positive statement the can be tested and validated: "what is"
Normative Statement
Cannot be empirically tested or validated: "what ought to be"
Endogenous Factors
Factors we have accounted for
Exogenous Factors
Factors beyond our control
Law of Increasing Opportunity Cost
Opportunity cost of producing a good rises as a society produces more of it
Time Trade-Off: Short Run
Decisions that reflect our immediate or short-term wants, needs, or limitations (partially adjust
behavior)
Time Trade-Off: Long Run
Make decisions that reflect our wants, needs, and limitation over long run (consumers have time
to fully adjust to market conditions)
Market Economy
Resources allocated among households and firms with little or no government interference
