PRINCIPLES OF MICROECONOMICS FINAL
EXAM COMPREHENSIVE STUDY GUIDE 2026
VERIFIED ANSWERS
◉ What is the production possibility curve? Why is it bowed out
from the origin? Answer: the production possibility curve shows for
given resources (land, labor, capital) and technology what are the
maximum alternative amounts for two goods that can be produced
the production possibility curve is concave to the origin because in
situations of fixed fully-utilized resources and technology, increasing
the quantity of one good is only done by giving up more and more of
the other good
there is a law of increasing cost, this situation occurs because some
resources are better at producing one good than the other, that is
they are relatively specialized
◉ What is the opportunity cost of increasing capital goods this
period and how does production of capital goods affect next period's
production-possibility curve? Answer: when capital goods are
produced this period they will be added to use able capital the next
period and shift out the production possibles curve
however, during the period in which they are produced, less
consumer good are produced, because making capital goods is an
alternative use of resources
,◉ What is the circular flow of goods and services? Answer:
household provide resources that they own to firms through Factor
Markets
Firms use resources to produce goods and services which they
supply to household through Product Markets
Households use the income they receive form their resources to buy
the products produced
◉ What is the principle of comparative advantage? Answer: The
principle of comparative advantage states that a person should
produce that good in which they have the lowest opportunity cost
ex. the best lawyer who is also the best secretary
◉ What is the Fallacy of Composition? Answer: the incorrect
statement that because something is true of a part it is necessarily
true of the whole
◉ What is the post hoc fallacy? Answer: the incorrect statement that
because something comes before something else, it necessarily
causes it
◉ What are positive statements? Answer: are about what IS, they are
descriptive and can be tested
, ◉ What are normative statements? Answer: are about what SHOULD
BE, they are value statements and cannot be tested
◉ What is the Law of Supply? Answer: quantity supplied is directly
(positively) related to price, all other factors constant
◉ What is the Law of Demand? Answer: quantity demanded is
inversely (negatively) related to price, all other factors constant
◉ What is the difference between a change in demand and a change
in quantity demanded? Answer: a change in demand is a shift of the
demand curve and a change in the quantity demand is movement
along the demand curve
◉ What is a normal good? Answer: are when demand increases
when income increase
◉ What is an inferior good? Answer: are when demand decrease
when income increases
◉ What is a substitute good? Answer: good which is used instead of
another good
ex. orange v. tangerine
EXAM COMPREHENSIVE STUDY GUIDE 2026
VERIFIED ANSWERS
◉ What is the production possibility curve? Why is it bowed out
from the origin? Answer: the production possibility curve shows for
given resources (land, labor, capital) and technology what are the
maximum alternative amounts for two goods that can be produced
the production possibility curve is concave to the origin because in
situations of fixed fully-utilized resources and technology, increasing
the quantity of one good is only done by giving up more and more of
the other good
there is a law of increasing cost, this situation occurs because some
resources are better at producing one good than the other, that is
they are relatively specialized
◉ What is the opportunity cost of increasing capital goods this
period and how does production of capital goods affect next period's
production-possibility curve? Answer: when capital goods are
produced this period they will be added to use able capital the next
period and shift out the production possibles curve
however, during the period in which they are produced, less
consumer good are produced, because making capital goods is an
alternative use of resources
,◉ What is the circular flow of goods and services? Answer:
household provide resources that they own to firms through Factor
Markets
Firms use resources to produce goods and services which they
supply to household through Product Markets
Households use the income they receive form their resources to buy
the products produced
◉ What is the principle of comparative advantage? Answer: The
principle of comparative advantage states that a person should
produce that good in which they have the lowest opportunity cost
ex. the best lawyer who is also the best secretary
◉ What is the Fallacy of Composition? Answer: the incorrect
statement that because something is true of a part it is necessarily
true of the whole
◉ What is the post hoc fallacy? Answer: the incorrect statement that
because something comes before something else, it necessarily
causes it
◉ What are positive statements? Answer: are about what IS, they are
descriptive and can be tested
, ◉ What are normative statements? Answer: are about what SHOULD
BE, they are value statements and cannot be tested
◉ What is the Law of Supply? Answer: quantity supplied is directly
(positively) related to price, all other factors constant
◉ What is the Law of Demand? Answer: quantity demanded is
inversely (negatively) related to price, all other factors constant
◉ What is the difference between a change in demand and a change
in quantity demanded? Answer: a change in demand is a shift of the
demand curve and a change in the quantity demand is movement
along the demand curve
◉ What is a normal good? Answer: are when demand increases
when income increase
◉ What is an inferior good? Answer: are when demand decrease
when income increases
◉ What is a substitute good? Answer: good which is used instead of
another good
ex. orange v. tangerine
