D089 - PRINCIPLES OF ECONOMICS |
STUDY GUIDE | QUESTIONS AND ANSWERS
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,Economics The study of how humans make decisions in the face of scarcity.
Factors of production Describes the inputs used in the production of goods or services to make an economic
profit.
scarcity The basic economic problem; the gap between limited, scarce, resources and
theoretically limitless wants
What to produce, how it will be produced, and for whom the What are the three fundamental questions every economy must answer?
goods or services are produced.
Principle 1: Everyone faces tradeoffs People must decide what they are willing to give up to get what they need or want.
Opportunity Cost The next best alternative that is given up when a choice is made
Principle 2: The cost of something is determined by what you Opportunity cost is the value of the next best alternative. The idea behind opportunity
give up to get it cost is that the cost of one item is the lost opportunity to do or consume something else.
Principle 3: Rational people think at the margin People make better decisions when they consider if the additional benefit they gain from
one more unit is greater than the additional cost of that extra unit of a good or service.
Marginal benefit The additional benefit you gain from consuming one more of something—the higher test
grade you get from studying one more hour.
Marginal Cost The additional cost you incur from consuming that additional unit—the hour of TV you are
giving up.
Principle 4: People respond to incentives Since most decisions are based on costs versus benefits, people's attitudes may change
when there is a change in the cost or benefit of something.
Principle 5: Trade can leave everyone in a better position Trade allows people to concentrate on what they do best and exchange their ability with
others to supplement their own needs.
Principle 6: Markets are a sound method of organizing Free markets are comprised of many goods and services as well as multiple buyers and
economic activity sellers who are mostly focused on their own well-being. Free markets have consistently
succeeded in promoting organized economic activity and achieving overall economic
well-being.
, Principle 7: Governments can sometimes better market In some cases, government intervention through policy can promote market efficiency
outcomes and equity. However, economists are cautious about external interventions because they
have been known to cause unintended issues for the economic system.
Principle 8: The standard of living for a nation is determined by There is a fundamental relationship between productivity and living standards. The more
its ability to produce goods and services productive a society, the better its people live.
Principle 9: Printing too much money causes prices to rise Consistently rising prices for goods and services results in inflation. This economic
phenomenon is directly related to excessive government-printed currency circulating.
Principle 10: Society faces a short-run trade-off between Most economists agree that there is a relationship between inflation and unemployment.
inflation and unemployment To lower inflation, the government may reduce the amount of money in the economy.
This, in turn, reduces the amount of money people spend.
traditional economy What kind of economy?
Command (centralized) economy What kind of economy?
market (decentralized) economy What kind of economy?
Mixed economy In this type of economic system, decisions are made based on consumer demands.
However, there is government involvement in making decisions about consumer safety,
environmental, and other regulations.
STUDY GUIDE | QUESTIONS AND ANSWERS
| OBJECTIVE ASSESSMENT PREP | GRADED
A+ | GUARANTEED SUCCESS
Updated Questions and Answers | 100% Verified Exam Prep
,Economics The study of how humans make decisions in the face of scarcity.
Factors of production Describes the inputs used in the production of goods or services to make an economic
profit.
scarcity The basic economic problem; the gap between limited, scarce, resources and
theoretically limitless wants
What to produce, how it will be produced, and for whom the What are the three fundamental questions every economy must answer?
goods or services are produced.
Principle 1: Everyone faces tradeoffs People must decide what they are willing to give up to get what they need or want.
Opportunity Cost The next best alternative that is given up when a choice is made
Principle 2: The cost of something is determined by what you Opportunity cost is the value of the next best alternative. The idea behind opportunity
give up to get it cost is that the cost of one item is the lost opportunity to do or consume something else.
Principle 3: Rational people think at the margin People make better decisions when they consider if the additional benefit they gain from
one more unit is greater than the additional cost of that extra unit of a good or service.
Marginal benefit The additional benefit you gain from consuming one more of something—the higher test
grade you get from studying one more hour.
Marginal Cost The additional cost you incur from consuming that additional unit—the hour of TV you are
giving up.
Principle 4: People respond to incentives Since most decisions are based on costs versus benefits, people's attitudes may change
when there is a change in the cost or benefit of something.
Principle 5: Trade can leave everyone in a better position Trade allows people to concentrate on what they do best and exchange their ability with
others to supplement their own needs.
Principle 6: Markets are a sound method of organizing Free markets are comprised of many goods and services as well as multiple buyers and
economic activity sellers who are mostly focused on their own well-being. Free markets have consistently
succeeded in promoting organized economic activity and achieving overall economic
well-being.
, Principle 7: Governments can sometimes better market In some cases, government intervention through policy can promote market efficiency
outcomes and equity. However, economists are cautious about external interventions because they
have been known to cause unintended issues for the economic system.
Principle 8: The standard of living for a nation is determined by There is a fundamental relationship between productivity and living standards. The more
its ability to produce goods and services productive a society, the better its people live.
Principle 9: Printing too much money causes prices to rise Consistently rising prices for goods and services results in inflation. This economic
phenomenon is directly related to excessive government-printed currency circulating.
Principle 10: Society faces a short-run trade-off between Most economists agree that there is a relationship between inflation and unemployment.
inflation and unemployment To lower inflation, the government may reduce the amount of money in the economy.
This, in turn, reduces the amount of money people spend.
traditional economy What kind of economy?
Command (centralized) economy What kind of economy?
market (decentralized) economy What kind of economy?
Mixed economy In this type of economic system, decisions are made based on consumer demands.
However, there is government involvement in making decisions about consumer safety,
environmental, and other regulations.
