29 Questions
What does economics study?
How society manages its scarce resources
According to Principle #1, what do all decisions involve?
Trade-offs
What kind of trade-off does society face, according to the text?
Efficiency vs. other needs
What do firms decide, according to the text?
How much to produce and how many workers to hire
What is the limited nature of society's resources referred to as?
Scarcity
What are the principles discussed in the chapter?
Principles of how people make decisions and interact
Which principle states that the cost of something is what you give up to get it?
Principle #2: The cost of something is what you give up to get it
In economics, what does 'opportunity cost' refer to?
The cost of obtaining something in terms of the next best alternative
What is the definition of 'incentive' in economics?
Something that induces a person to act
When making decisions, what do rational people do according to Principle #3?
Think at the margin, evaluating costs and benefits of marginal changes
Based on the scenario provided, should the transmission be repaired in scenario A?
Yes, because the benefit of fixing the transmission is $800
According to Principle #4, how do rational people respond to incentives?
By responding to incentives such as rewards and forfeits
What principle states that rational people systematically and purposefully do the best they can to achieve their objectives?
Principle #3: Rational people think at the margin
What is the main role of economists as scientists?
Explaining how the world works through the scientific method
What is the circular-flow diagram a visual representation of?
The flow of money through markets among households and firms
What do economists use to simplify the complex world in their scientific role?
Highly simplified models
What are the two types of 'actors' in the circular-flow diagram?
Households and firms
What is the purpose of assumptions in the economist's scientific role?
To simplify the complex world
What is the main purpose of the market for 'factors of production' in the circular-flow diagram?
To allocate resources in the economy
What does the Production Possibilities Frontier (PPF) graph show?
The combinations of output that the economy can possibly produce given the available resources and technology
Which points on the Production Possibilities Frontier (PPF) are considered possible and efficient?
Points on the PPF
What does it mean when an economy is operating below the Production Possibilities Frontier (PPF)?
It is possible but inefficient
What does the slope of the Production Possibilities Frontier (PPF) indicate?
The opportunity cost of one good in terms of the other
What causes a shift in the Production Possibilities Frontier (PPF)?
Technological advance
What determines whether the Production Possibilities Frontier (PPF) is straight or bow-shaped?
The opportunity cost as the economy shifts resources from one industry to another
What does a bow-shaped Production Possibilities Frontier (PPF) illustrate?
Increasing opportunity cost
What concepts does the Production Possibilities Frontier (PPF) illustrate?
Scarcity, efficiency, trade-offs, opportunity cost, and economic growth
What does a bow-shaped Production Possibilities Frontier (PPF) indicate about opportunity cost?
It increases as more of one good is produced
What does a shift outward of the Production Possibilities Frontier (PPF) indicate?
Increased potential output of both goods due to technological advance
Study Notes
What Economics Studies
- Economics studies the way societies make decisions about how to allocate resources to satisfy their unlimited wants and needs.
Principles of Economics
- Principle #1: All decisions involve trade-offs, meaning that choices must be made between different options.
- Principle #2: The cost of something is what you give up to get it, also known as opportunity cost.
- Principle #3: Rational people make decisions by comparing the benefits and costs of their choices.
- Principle #4: Rational people respond to incentives, meaning that they make decisions based on the rewards or penalties of their choices.
Key Concepts
- Opportunity cost: The value of the next best alternative that is given up when a choice is made.
- Incentive: A reward or penalty that motivates people to make certain choices.
- Limited nature of society's resources: The concept that the resources available to society are finite, and thus, choices must be made about how to allocate them.
Firms and Decision Making
- Firms decide how to produce goods and services, and how to allocate resources to achieve their objectives.
Circular-Flow Diagram
- The circular-flow diagram is a visual representation of the economy, showing the flow of resources and goods between households and firms.
- Two types of actors in the circular-flow diagram: households and firms.
- The main role of the market for 'factors of production' is to allocate resources from households to firms.
Production Possibilities Frontier (PPF)
- The PPF graph shows the different combinations of two goods or services that can be produced given the resources available.
- Points on the PPF are considered possible and efficient if they are on the frontier.
- An economy operating below the PPF is not producing at its full potential.
- The slope of the PPF indicates the opportunity cost of producing one good versus another.
- A shift in the PPF is caused by a change in the resources available or technology.
- The shape of the PPF (straight or bow-shaped) is determined by the nature of the production possibilities.
- A bow-shaped PPF illustrates the increasing opportunity cost of producing one good versus another.
- The PPF illustrates the concepts of scarcity, opportunity cost, and the trade-offs involved in decision making.
- A shift outward of the PPF indicates an increase in the resources available or an improvement in technology.
Test your knowledge about the principles of economics and how people make decisions, interact, and how the economy works. This quiz is based on the principles discussed in the book 'Principle of Economics Arab World Edition, 4e' by N. Gregory Mankiw and Mohamed H. Rashwan.
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