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Questions and Answers
What does the framing effect in decision making imply?
Which of the following statements is an example of the sunk cost fallacy?
What is indicated by a bowed-out production possibilities frontier (PPF)?
Positive statements in economics are characterized by which of the following?
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Which type of resource is considered a capital resource?
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What is the primary focus of microeconomics?
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How is opportunity cost defined in economics?
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Which principle involves making decisions in small, incremental steps?
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What is the primary condition that creates scarcity?
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What does the law of diminishing marginal utility state?
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In decision making, what does the interdependence principle take into account?
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What are incentives in economics?
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What aspect does macroeconomics primarily study?
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Study Notes
Economic Principles and Concepts
- Scarcity exists when resources are insufficient to meet everyone's wants, leading to the fundamental economic issue.
- Economics studies human behavior under conditions of scarcity, focusing on decision-making processes.
- Cost-benefit principle involves weighing the advantages and disadvantages of choices made.
- Marginal principle refers to making decisions based on incremental changes or the next unit.
- Opportunity cost is the value of the next best alternative forgone when making a decision.
- Interdependence principle highlights how external factors (like others' preferences) can influence personal choices.
Types of Economics
- Microeconomics focuses on individual decisions and their effects on specific markets.
- Macroeconomics examines the overall economy, including growth and sustainability factors.
Key Economic Terms
- Utility measures total satisfaction derived from a choice or decision.
- Incentives are factors that affect individual behavior and decision-making.
- Decisions regarding quantity are best made incrementally, using marginal decision-making approaches.
Consumer Behavior Theory
- Law of Diminishing Marginal Utility indicates that additional consumption yields decreasing satisfaction over time.
- Economic assumptions often presume stable preferences enabling individuals to navigate a range of options.
Cognitive Biases in Decision Making
- Cognitive Bias refers to systematic errors in judgment that affect decisions.
- Framing Effect shows how decision-making can be swayed by the presentation of information rather than the facts.
- Present Bias reveals a tendency to prioritize immediate benefits over larger future rewards.
- Sunk Cost Fallacy describes the inclination to continue investing in a project due to prior commitments, regardless of current costs.
Economic Models and Graphs
- Ceteris Paribus (Latin for "all other things being equal") is a principle that simplifies analysis by holding variables constant.
- Production Possibilities Frontier (PPF) graphically illustrates the potential output combinations of an economy given its resources and technology.
- Points can be plotted on, inside, or outside the PPF to indicate efficiency, underutilization, or unattainable production levels.
Factors of Production
- Factors of production include natural, human, and capital resources needed to produce goods and services.
- Intermediate goods are products used to manufacture other goods, becoming integral parts of the final product.
Curves and Costs
- A straight PPF signifies constant opportunity costs, while a bowed-out PPF reflects increasing opportunity costs as production shifts.
- PPF can shift due to changes in resources or technology, illustrating economic growth or contraction.
Economic Statements
- Positive Statements describe and predict economic events based on objective analysis, allowing empirical testing.
- Normative Statements involve subjective judgments about what ought to happen, usually implying moral or ethical considerations.
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Description
Test your understanding of key economic principles such as scarcity, cost-benefit analysis, and opportunity cost. This quiz will challenge your ability to apply these concepts to real-world decision-making scenarios. Perfect for students studying introductory economics.
