Ten Principles of Economics Practice Test and Quiz

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Questions and Answers

What does economics study?

How society divides its unlimited resources

How people manage their abundant resources

How society manages its scarce resources (correct)

How people decide to waste their resources

According to Principle #1, what do all decisions involve?

Unlimited resources

Infinite opportunities

Trade-offs (correct)

Cost-benefit analysis

What kind of trade-off does society face, according to the text?

Prosperity vs. abundance

Efficiency vs. laziness

Efficiency vs. other needs (correct)

Savings vs. spending

What do firms decide, according to the text?

How much to produce and how many workers to hire Signup and view all the answers

What is the limited nature of society's resources referred to as?

Scarcity Signup and view all the answers

What are the principles discussed in the chapter?

Principles of how people make decisions and interact Signup and view all the answers

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 Signup and view all the answers

In economics, what does 'opportunity cost' refer to?

The cost of obtaining something in terms of the next best alternative Signup and view all the answers

What is the definition of 'incentive' in economics?

Something that induces a person to act Signup and view all the answers

When making decisions, what do rational people do according to Principle #3?

Think at the margin, evaluating costs and benefits of marginal changes Signup and view all the answers

Based on the scenario provided, should the transmission be repaired in scenario A?

Yes, because the benefit of fixing the transmission is $800 Signup and view all the answers

According to Principle #4, how do rational people respond to incentives?

By responding to incentives such as rewards and forfeits Signup and view all the answers

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 Signup and view all the answers

What is the main role of economists as scientists?

Explaining how the world works through the scientific method Signup and view all the answers

What is the circular-flow diagram a visual representation of?

The flow of money through markets among households and firms Signup and view all the answers

What do economists use to simplify the complex world in their scientific role?

Highly simplified models Signup and view all the answers

What are the two types of 'actors' in the circular-flow diagram?

Households and firms Signup and view all the answers

What is the purpose of assumptions in the economist's scientific role?

To simplify the complex world Signup and view all the answers

What is the main purpose of the market for 'factors of production' in the circular-flow diagram?

To allocate resources in the economy Signup and view all the answers

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 Signup and view all the answers

Which points on the Production Possibilities Frontier (PPF) are considered possible and efficient?

Points on the PPF Signup and view all the answers

What does it mean when an economy is operating below the Production Possibilities Frontier (PPF)?

It is possible but inefficient Signup and view all the answers

What does the slope of the Production Possibilities Frontier (PPF) indicate?

The opportunity cost of one good in terms of the other Signup and view all the answers

What causes a shift in the Production Possibilities Frontier (PPF)?

Technological advance Signup and view all the answers

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 Signup and view all the answers

What does a bow-shaped Production Possibilities Frontier (PPF) illustrate?

Increasing opportunity cost Signup and view all the answers

What concepts does the Production Possibilities Frontier (PPF) illustrate?

Scarcity, efficiency, trade-offs, opportunity cost, and economic growth Signup and view all the answers

What does a bow-shaped Production Possibilities Frontier (PPF) indicate about opportunity cost?

It increases as more of one good is produced Signup and view all the answers

What does a shift outward of the Production Possibilities Frontier (PPF) indicate?

Increased potential output of both goods due to technological advance Signup and view all the answers

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.

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Description

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.

Chapter 1 Ten Principles of Economics Quiz

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