(Week 1, Quiz 2) Introduction to Scarcity and Economic Models

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Questions and Answers

What does the term 'scarcity' refer to?

The relationship between supply and demand

The amount of products available in the market

The ability to produce unlimited goods

The situation where unlimited wants exceed limited resources (correct)

Opportunity cost is the cost of the next best alternative when a choice is made.

True

What are the three key economic ideas presented?

People are rational, People respond to economic incentives, Optimal decisions are made at the margin.

What is positive analysis focused on?

What is Signup and view all the answers

Normative analysis can be tested using facts.

False Signup and view all the answers

Scarcity occurs because _______ exceed limited resources.

unlimited wants Signup and view all the answers

Match the following economic concepts with their descriptions:

Absolute Advantage = Ability to produce more of a good with the same resources Comparative Advantage = Ability to produce a good at a lower opportunity cost Production Possibility Frontier (PPF) = Graph showing maximum feasible output combinations Marginal Analysis = Comparing marginal benefits and costs of a decision Signup and view all the answers

Define 'opportunity cost'.

Next best alternative forgone Signup and view all the answers

Which statement correctly describes 'trade-offs'?

Producing more of one good means producing less of another Signup and view all the answers

The production possibility frontier illustrates ______.

economic growth Signup and view all the answers

Economic models are exact representations of real-world situations.

False Signup and view all the answers

Match the following concepts with their definitions:

Absolute advantage = Ability to produce more using the same resources Comparative advantage = Ability to produce at a lower opportunity cost Explicit cost = Actual expenses incurred Implicit cost = Implied or non-monetary costs Signup and view all the answers

What is the first step in developing an economic model?

Decide on the assumptions to be used in developing the model. Signup and view all the answers

Which statement describes microeconomics?

Study of household and firm choices Signup and view all the answers

Economic growth can be illustrated using the production possibility frontier.

True Signup and view all the answers

An economic variable is something measurable that relates to _______.

resources Signup and view all the answers

Which of the following statements about marginal decisions is true?

Optimal decisions are made at the margin Signup and view all the answers

What is the optimum point in economic graphs?

Where Marginal Benefit equals Marginal Cost (MB = MC) Signup and view all the answers

The ability to produce a good at a lower opportunity cost is known as ______.

comparative advantage Signup and view all the answers

What is the basis for trade?

Comparative advantage Signup and view all the answers

Study Notes

Scarcity and Trade-offs

Scarcity arises when unlimited wants exceed limited resources.
Resources include natural (land, water, minerals), labor, capital, and entrepreneurial ability.
Trade-off reflects that increasing the production of one good reduces the production of another due to scarcity.

Economic Models

Economic models simplify reality to analyze real-world economic situations.
Economic variables are measurable elements related to resources, such as wages and prices.
Model development steps:
- Decide on assumptions
- Formulate a testable hypothesis
- Test the hypothesis with data
- Revise the model if necessary
- Use the revised model for future questions

Economic Analysis Types

Positive analysis: Focuses on what is; value-free, fact-based statements that can be verified.
Normative analysis: Concerned with what ought to be; involves untestable value judgments.

Microeconomics vs. Macroeconomics

Microeconomics studies choices made by households and firms and their market interactions.
Macroeconomics examines the economy as a whole, covering inflation, unemployment, and growth.

Economic Growth

Economic growth signifies the expansion of a society's production potential.
Illustrated through the Production Possibility Frontier (PPF).

Comparative Advantage and Trade

Comparative advantage is crucial for gains from specialization and trade.
Trade involves buying and selling goods or services within a market.
Absolute advantage refers to the ability to produce more using the same resources than others, while comparative advantage focuses on producing with lower opportunity costs.
Specialization in production according to comparative advantage leads to better trade outcomes.

Opportunity Cost

Opportunity cost is defined as the next best alternative forgone when making a choice.
Formula: Opportunity Cost = Implicit Cost + Explicit Cost.
Explicit costs represent actual expenses incurred; implicit costs indicate implied or non-monetary costs.

Economic Graphs

Label all graphs for clarity.
The price is plotted on the Y-axis, while quantity is plotted on the X-axis.
Efficiency is achieved at the optimum point where Marginal Benefit equals Marginal Cost (MB = MC).

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Description

This quiz explores key concepts in economics, focusing on scarcity, trade-offs, and the development of economic models. Test your understanding of positive and normative analysis, as well as the distinctions between microeconomics and macroeconomics. Challenge your knowledge of how these principles apply to real-world situations.