Economics Chapter on Scarcity and Trade-offs

Questions and Answers

What does the phenomenon of scarcity stem from?

resources are limited

What does the adage, 'there is no such thing as a free lunch', illustrate?

people face tradeoffs

What basic principle does Sophia's situation illustrate when she must choose between the swimming pool and a movie?

people face tradeoffs

What is a tradeoff that occurs when society requires that firms reduce pollution?

a tradeoff because of reduced incomes to the firms owners and workers Signup and view all the answers

When the government implements programs such as progressive income tax rates, which of the following is likely to occur?

Equality is increased and efficiency is decreased Signup and view all the answers

What should be included when computing the opportunity cost of attending a concert?

the cost of the ticket and the value of your time Signup and view all the answers

What does a rational decision maker take an action only if?

marginal benefit is greater than the marginal cost Signup and view all the answers

What principle does the situation of Iowans purchasing cigarettes from surrounding states illustrate?

people respond to incentives Signup and view all the answers

Why can trade be beneficial as argued by Emma?

because it allows specialization, which increases total output Signup and view all the answers

In an economy guided by prices and individual self-interest, what is the potential outcome?

the potential to achieve efficiency in production Signup and view all the answers

For which problems can well-designed public policy enhance economic efficiency?

Both externalities and market power Signup and view all the answers

What do laws that restrict smoking in public places aim to reduce?

externalities Signup and view all the answers

Based on production data, where is the standard of living likely to be higher?

in France than in Germany Signup and view all the answers

Which concept is likely to be permanently changed by a permanent increase in the growth rate of the money supply?

Inflation Signup and view all the answers

In the short run, which rate of growth in the money supply is likely to lead to the highest level of unemployment?

1 percent per year Signup and view all the answers

Which arrow shows the flow of income payments?

D Signup and view all the answers

To which arrows does Jane's shoe purchase directly contribute?

Arrow A Signup and view all the answers

Which arrow does Erin's paycheck directly contribute to?

Arrow D Signup and view all the answers

Efficiency is illustrated by?

the production possibilities frontier only Signup and view all the answers

What is not a concept included in the production possibilities frontier (PPF)?

equality Signup and view all the answers

Where is production possible and efficient?

at points Q, S, T Signup and view all the answers

What could cause the movement from point S to point R in production?

Unemployment Signup and view all the answers

In order to gain 2 radios, how many televisions must society sacrifice moving from point S to point T?

6 televisions Signup and view all the answers

What could cause a shift of the economy's production possibilities frontier from Panel (a) to Panel (b)?

an improvement in radio production technology Signup and view all the answers

Which event would explain the shift of the production possibilities frontier from a to b?

The economy experienced a technological advance in the production of batteries Signup and view all the answers

Which of the following would most likely cause the production possibilities frontier to shift outward from a to b?

A general technological advance Signup and view all the answers

What is an example of a positive statement?

Increasing the minimum wage results in more unemployment Signup and view all the answers

When a production possibilities frontier is bowed outward, what happens to the opportunity cost of producing an additional unit of a good?

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

If the price of a substitute to good X increases, what is likely to happen to the demand for good X?

Demand for good X will increase Signup and view all the answers

What do externalities refer to?

the cost or benefit that affects a party who did not choose to incur that cost or benefit. Signup and view all the answers

What is inflation?

a general increase in prices and fall in the purchasing value of money. Signup and view all the answers

What does efficiency mean in economics?

using resources in such a way as to maximize the production of goods and services Signup and view all the answers

What does the abbreviation 'PPF' stand for?

production possibilities frontier Signup and view all the answers

What does the production possibilities frontier describe?

a line on a production possibilities curve that shows the maximum possible output an economy can produce Signup and view all the answers

What is equality in economic terms?

the property of distributing economic prosperity uniformly among the members of society Signup and view all the answers

What is a positive statement?

is a statement that can be verified true or false Signup and view all the answers

What do tastes refer to in economic terms?

Changes in demand Signup and view all the answers

What does scarcity mean?

the limited nature of society's resources Signup and view all the answers

What encompasses the study of economics?

the study of how people seek to satisfy their needs and wants by making choices Signup and view all the answers

What does it mean that people face trade-offs?

making decisions requires trading off one goal against another Signup and view all the answers

What is opportunity cost?

whatever must be given up to obtain some item Signup and view all the answers

What does it mean to systematically and purposefully make decisions?

do the best they can to achieve their objectives Signup and view all the answers

What are marginal changes?

small incremental adjustments to a plan of action Signup and view all the answers

What is the condition for marginal benefit?

needs to be higher than marginal cost Signup and view all the answers

What is an incentive?

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

What is a market?

a group of buyers and sellers of a particular good or service Signup and view all the answers

What does market power refer to?

source of market failure Signup and view all the answers

What does a country's standard of living depend on?

its ability to produce goods and services Signup and view all the answers

What is a circulation flow diagram?

a model that illustrates how participants in markets are linked Signup and view all the answers

To produce an efficient level of output, you must?

be on the production possibilities frontier Signup and view all the answers

What does Quantity Demanded (Qd) represent?

the amount of a good that buyers are willing and able to purchase Signup and view all the answers

What is indicated by low demand?

only a few people want a product, prices go down Signup and view all the answers

What does a demand curve graphically represent?

a graph of the relationship between the price of a good and the quantity demanded Signup and view all the answers

What is a market demand curve?

the demand curve that shows the quantities demanded by everyone who is interested in purchasing the product Signup and view all the answers

What does market demand refer to?

the sum of all the individual demands for a particular good or service Signup and view all the answers

Study Notes

Scarcity and Trade-offs

Scarcity arises because resources are limited, necessitating choices.
The phrase "there is no such thing as a free lunch" emphasizes that every choice involves trade-offs.
Personal examples, like choosing between swimming and a movie, illustrate how individuals face trade-offs when making decisions.

Economic Efficiency and Policy

Reducing pollution via regulatory measures creates trade-offs, affecting incomes of firms and employees.
Government programs aimed at equality, like progressive income taxes, may enhance equality but often reduce efficiency.
Concepts of economic efficiency can be improved through well-designed public policies, addressing issues such as externalities and market power.

Decision-Making and Incentives

Rational decision-makers act only when the marginal benefit exceeds the marginal cost.
Price increases, such as a $1 rise in cigarette costs in Iowa, lead consumers to look for alternatives, demonstrating that people respond to incentives.

Trade and Specialization

Trade with other countries promotes specialization, resulting in greater outputs and overall benefits in production levels.

Production Possibilities Frontier (PPF)

The PPF illustrates the maximum possible output for an economy; efficiency is achieved only at certain points.
Shifts in the PPF can result from advancements in technology, changing resource availability, or other economic factors.
A bowed outward PPF indicates rising opportunity costs as more of a good is produced.

Economic Concepts

The opportunity cost includes all costs associated with pursuing an alternative.
Inflation denotes a general increase in prices and decreased purchasing power of money.
Externalities refer to costs or benefits that affect third parties, often leading to market failures.

Demand and Market Dynamics

Quantity demanded represents how much of a good buyers are ready to purchase at given prices.
Low demand indicates that only a small number of people are interested in a product, typically leading to price reductions.
Demand curves showcase the relationship between product price and quantity demanded across the market.

Standard of Living and Economic Growth

A country's standard of living is linked to its capacity to produce goods and services, influencing overall well-being.
Systematic and purposeful decision-making involves maximizing objectives within resource constraints.

Economic Growth References

Permanent increases in the growth rate of the money supply generally lead to sustained inflation while specific monetary growth rates might correlate with higher unemployment rates short-term.

Market Structure and Power

Market power leads to failures in efficient allocation of resources and can impact overall market equilibrium.

Key Definitions

Efficiency: Utilizing resources to maximize production output.
Positive Statement: Observable and verifiable statements capable of being true or false.
Incentives: Factors motivating individuals to take specific actions.
Market Demand: Aggregated demand from all individual consumers in a market.

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Description

Explore the fundamental concepts of scarcity and trade-offs in this quiz. Understand how individuals and governments make choices based on limited resources and their impacts on efficiency and policy. Test your knowledge on decision-making and incentives in economic scenarios.