Principles of Economics Exam
Questions with Answers
division of labor - ✔✔the way in which the work required to produce a good or service is
divided into tasks performed by different workers
economics - ✔✔the study of how humans make choices under conditions of scarcity
economies of scale - ✔✔when the average cost of producing each individual unit declines as
total output increases
scarcity - ✔✔when human wants for goods and services exceed the available supply
specialization - ✔✔when workers or firms focus on particular tasks for which they are well-
suited within the overall production process
fiscal policy - ✔✔economic policies that involve government spending and taxes
macroeconomics - ✔✔the branch of economics that focuses on broad issues such as growth,
unemployment - ✔✔inflation, and trade balance.
Microeconomics - ✔✔the branch of economics that focuses on actions of particular agents
within the economy, like households, workers, and business firms
monetary policy - ✔✔policy that involves altering the level of interest rates, the availability of
credit in the economy, and the extent of borrowing
,circular flow diagram - ✔✔a diagram that views the economy as consisting of households and
firms interacting in a goods and services market and a labor market
goods and services market - ✔✔a market in which firms are sellers of what they produce and
households are buyers
labor market - ✔✔the market in which households sell their labor as workers to business firms
or other employers
theory - ✔✔a representation of an object or situation that is simplified while including enough
of the key features to help us understand the object or situation
command economy - ✔✔an economy where economic decisions are passed down from
government authority and where resources are owned by the government
exports - ✔✔products (goods and services) made domestically and sold abroad
globalization - ✔✔the trend in which buying and selling in markets have increasingly crossed
national borders
gross domestic product (GDP) - ✔✔measure of the size of total production in an economy
imports - ✔✔products (goods and services) made abroad and then sold domestically
market - ✔✔interaction between potential buyers and sellers; a combination of demand and
supply
market economy - ✔✔an economy where economic decisions are decentralized, resources are
owned by private individuals, and businesses supply goods and services based on demand
,private enterprise - ✔✔system where the means of production (resources and businesses) are
owned and operated by private individuals or groups of private individuals
traditional economy - ✔✔typically an agricultural economy where things are done the same as
they have always been done
underground economy - ✔✔a market where the buyers and sellers make transactions in
violation of one or more government regulations
budget constraint - ✔✔all possible consumption combinations of goods that someone can
afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
law of diminishing marginal utility - ✔✔as we consume more of a good or service, the utility we
get from additional units of the good or service tend to become smaller than what we received
from earlier units
marginal analysis - ✔✔examination of decisions on the margin, meaning a little more or a little
less from the status quo
opportunity cost - ✔✔measures cost by what is given up in exchange; opportunity cost
measures the value of the forgone alternative
opportunity set - ✔✔all possible combinations of consumption that someone can afford given
the prices of goods and the individual's income
sunk costs - ✔✔costs that are made in the past and cannot be recovered
utility - ✔✔satisfaction, usefulness, or value one obtains from consuming goods and services
, allocative efficiency - ✔✔when the mix of goods being produced represents the mix that
society most desires
comparative advantage - ✔✔when a country can produce a good at a lower cost in terms of
other goods; or, when a country has a lower opportunity cost of production
law of diminishing returns - ✔✔as additional increments of resources are added to producing a
good or service, the marginal benefit from those additional increments will decline
production possibilities frontier (PPF) - ✔✔a diagram that shows the productively efficient
combinations of two products that an economy can produce given the resources it has
available.
productive efficiency - ✔✔when it is impossible to produce more of one good (or service)
without decreasing the quantity produced of another good (or service)
invisible hand - ✔✔idea that self-interested behavior by individuals can lead to positive social
outcomes
normative statement - ✔✔statement which describes how the world should be
demand curve - ✔✔a graphic representation of the relationship between price and quantity
demanded of a certain good or service, with quantity on the horizontal axis and the price on the
vertical axis
demand schedule - ✔✔a table that shows a range of prices for a certain good or service and the
quantity demanded at each price
Questions with Answers
division of labor - ✔✔the way in which the work required to produce a good or service is
divided into tasks performed by different workers
economics - ✔✔the study of how humans make choices under conditions of scarcity
economies of scale - ✔✔when the average cost of producing each individual unit declines as
total output increases
scarcity - ✔✔when human wants for goods and services exceed the available supply
specialization - ✔✔when workers or firms focus on particular tasks for which they are well-
suited within the overall production process
fiscal policy - ✔✔economic policies that involve government spending and taxes
macroeconomics - ✔✔the branch of economics that focuses on broad issues such as growth,
unemployment - ✔✔inflation, and trade balance.
Microeconomics - ✔✔the branch of economics that focuses on actions of particular agents
within the economy, like households, workers, and business firms
monetary policy - ✔✔policy that involves altering the level of interest rates, the availability of
credit in the economy, and the extent of borrowing
,circular flow diagram - ✔✔a diagram that views the economy as consisting of households and
firms interacting in a goods and services market and a labor market
goods and services market - ✔✔a market in which firms are sellers of what they produce and
households are buyers
labor market - ✔✔the market in which households sell their labor as workers to business firms
or other employers
theory - ✔✔a representation of an object or situation that is simplified while including enough
of the key features to help us understand the object or situation
command economy - ✔✔an economy where economic decisions are passed down from
government authority and where resources are owned by the government
exports - ✔✔products (goods and services) made domestically and sold abroad
globalization - ✔✔the trend in which buying and selling in markets have increasingly crossed
national borders
gross domestic product (GDP) - ✔✔measure of the size of total production in an economy
imports - ✔✔products (goods and services) made abroad and then sold domestically
market - ✔✔interaction between potential buyers and sellers; a combination of demand and
supply
market economy - ✔✔an economy where economic decisions are decentralized, resources are
owned by private individuals, and businesses supply goods and services based on demand
,private enterprise - ✔✔system where the means of production (resources and businesses) are
owned and operated by private individuals or groups of private individuals
traditional economy - ✔✔typically an agricultural economy where things are done the same as
they have always been done
underground economy - ✔✔a market where the buyers and sellers make transactions in
violation of one or more government regulations
budget constraint - ✔✔all possible consumption combinations of goods that someone can
afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
law of diminishing marginal utility - ✔✔as we consume more of a good or service, the utility we
get from additional units of the good or service tend to become smaller than what we received
from earlier units
marginal analysis - ✔✔examination of decisions on the margin, meaning a little more or a little
less from the status quo
opportunity cost - ✔✔measures cost by what is given up in exchange; opportunity cost
measures the value of the forgone alternative
opportunity set - ✔✔all possible combinations of consumption that someone can afford given
the prices of goods and the individual's income
sunk costs - ✔✔costs that are made in the past and cannot be recovered
utility - ✔✔satisfaction, usefulness, or value one obtains from consuming goods and services
, allocative efficiency - ✔✔when the mix of goods being produced represents the mix that
society most desires
comparative advantage - ✔✔when a country can produce a good at a lower cost in terms of
other goods; or, when a country has a lower opportunity cost of production
law of diminishing returns - ✔✔as additional increments of resources are added to producing a
good or service, the marginal benefit from those additional increments will decline
production possibilities frontier (PPF) - ✔✔a diagram that shows the productively efficient
combinations of two products that an economy can produce given the resources it has
available.
productive efficiency - ✔✔when it is impossible to produce more of one good (or service)
without decreasing the quantity produced of another good (or service)
invisible hand - ✔✔idea that self-interested behavior by individuals can lead to positive social
outcomes
normative statement - ✔✔statement which describes how the world should be
demand curve - ✔✔a graphic representation of the relationship between price and quantity
demanded of a certain good or service, with quantity on the horizontal axis and the price on the
vertical axis
demand schedule - ✔✔a table that shows a range of prices for a certain good or service and the
quantity demanded at each price
