ECON 251 EXAM 1 PURDUE BLANCHARD STUDY
GUIDE
economics - Answers -a social science that studies the choices we make as we cope
with scarcity and the incentives that influence and reconcile our choices
scarcity - Answers -available resources are limited
4 resources (factors of production) - Answers -Natural resources (land), labor, capital
(not money! manmade), and entrepreneurship
Rational choices - Answers -if benefits ≥ costs then Do It
if benefits < costs then Don't Do It
Opportunity cost - Answers -Cost of the next best alternative use of money, time, or
resources when one choice is made rather than another
Sunk cost - Answers -a cost that has already been incurred and cannot be changed by
any decision made now or in the future
Marginal benefit - Answers -additional BENEFIT from ONE more unit
Marginal cost - Answers -additional COST from ONE more unit
Absolute advantage - Answers -produce faster or more in same amount of time
Comparative advantage - Answers -produce at the lowest cost
Rules of Comparative Advantage - Answers -1. if one person has CA in one task, the
other must have CA in the other
2. no one can have CA in every task
Production Possibility Frontier (PPF) - Answers -graph of the max output that can be
produced (slope = change in Y / change in X)
Characteristics of PPF - Answers -1. negative slope
2. magnitude of slope reflects marginal cost of "x"
3. as the slope gets steeper as X increases, MC increases too
Demand - Answers -maximum quantity a consumer is willing and able to purchase at
various prices
GUIDE
economics - Answers -a social science that studies the choices we make as we cope
with scarcity and the incentives that influence and reconcile our choices
scarcity - Answers -available resources are limited
4 resources (factors of production) - Answers -Natural resources (land), labor, capital
(not money! manmade), and entrepreneurship
Rational choices - Answers -if benefits ≥ costs then Do It
if benefits < costs then Don't Do It
Opportunity cost - Answers -Cost of the next best alternative use of money, time, or
resources when one choice is made rather than another
Sunk cost - Answers -a cost that has already been incurred and cannot be changed by
any decision made now or in the future
Marginal benefit - Answers -additional BENEFIT from ONE more unit
Marginal cost - Answers -additional COST from ONE more unit
Absolute advantage - Answers -produce faster or more in same amount of time
Comparative advantage - Answers -produce at the lowest cost
Rules of Comparative Advantage - Answers -1. if one person has CA in one task, the
other must have CA in the other
2. no one can have CA in every task
Production Possibility Frontier (PPF) - Answers -graph of the max output that can be
produced (slope = change in Y / change in X)
Characteristics of PPF - Answers -1. negative slope
2. magnitude of slope reflects marginal cost of "x"
3. as the slope gets steeper as X increases, MC increases too
Demand - Answers -maximum quantity a consumer is willing and able to purchase at
various prices
