Question 1

What is economics?

Accepted Answer

The science of scarcity and its implications for how resources should be used

Question 2

What is scarcity?

Accepted Answer

The gap between limited resources and theoretically unlimited wants

Question 3

What is macroeconomics?

Accepted Answer

The study of the global economy as a whole

(opposite of microeconomics, which is studying individuals)

Question 4

What is opportunity cost?

Accepted Answer

Benefits that are lost when one opportunity is chosen over another

(if you spend 3 hours watching Netflix before an exam instead of studying, the opportunity cost is time spent studying)

Question 5

What is a trade-off?

Accepted Answer

A situation where choosing one option means sacrificing another

Question 6

What are marginal benefits?

Accepted Answer

The additional benefits gained by consuming one additional unit of a good or service

(opposite of marginal cost)

Question 7

What is marginal cost?

Accepted Answer

The additional cost incurred by producing one additional unit of a good or service

Question 8

What is the production possibilities curve (PPC)?

Accepted Answer

A model used to show the tradeoffs associated with allocating resources between two different goods

Question 9

What are the three assumptions in a Production Possibilities Curve (PPC)

Accepted Answer

Only two goods can be made

Fixed resources

Fixed technology

Question 10

What determines the shape of the PPC?

Accepted Answer

Whether opportunity costs are constant, increasing, or decreasing

Question 11

What can cause the PPC to shift?

Accepted Answer

Changes in factors of production and changes in productivity/technology

Question 12

What happens to the PPC with economic growth?

Accepted Answer

It shifts outward

Question 13

What are capital goods?

Accepted Answer

Goods created for indirect consumption

(goods created for production; buildings, machinery, tools)

Question 14

What are consumer goods?

Accepted Answer

Goods created for consumption

(food, clothing)

Question 15

What is constant opportunity cost?

Accepted Answer

When resources are easily adaptable for producing either good in a PPC

(results in a straight PPC curve)

Question 16

What is increasing opportunity cost?

Accepted Answer

As the production of one good increases, the opportunity cost of producing an additional unit of that good increases.

(opposite of constant opportunity cost; causes a curved PPC)

Question 17

What does point 1 represent on this graph?

Accepted Answer

Point 1 represents an inefficient production point of resources

Question 18

What does point 2 represent on this PPC graph?

Accepted Answer

Point 2 represents a point of unattainable production

Question 19

How does investment in capital goods affect the PPC?

Accepted Answer

Investment in capital goods causes greater economic growth than consumer goods

Question 20

What is the opportunity cost of moving from B to C, given the following production possibilities?

Accepted Answer

4 shoes

Question 21

What is absolute advantage?

Accepted Answer

A situation where an individual, business, or country can produce more of a good or service than any other producer with the same quantity of resources

(also see comparative advantage)

Question 22

What is comparative advantage?

Accepted Answer

A situation where an individual, business, or country can produce a good or service at a lower opportunity cost than another producer

(also see absolute advantage)

Question 23

What is production specialization according to comparative advantage?

Accepted Answer

When producers specialize in the production of goods and services they have a comparative advantage for, they can increase their overall output and create exchange opportunities that lead to consumption opportunities beyond the PPC

(it is most efficient for everyone to do what they are best at)

Question 24

What determines the terms of trade for exchange?

Accepted Answer

Comparative advantage and opportunity costs

(take the opportunity cost for one item in between both countries' opportunity costs)

Question 25

What are terms of trade?

Accepted Answer

How much goods are exchanged for each other so that mutually beneficial trade can occur

Question 26

Which country has a comparative advantage in steel production?

Accepted Answer

Japan

Canada: 1000/500 = 2

Japan: 1200/300 = 4

4 > 2

Question 27

Which country has a comparative advantage in truck production?

Accepted Answer

Brazil

US: 6/3 = 2

Brazil: 2/2 = 1

1 < 2

(this is an input question, so the lower number is better)

Question 28

Using the same amount of time and resources, Tomer can either write 100 lines of code or process 20 reports, and Charlotte can either write 120 lines of code or process 20 reports

What would acceptable terms of trade be?

Accepted Answer

1 line of code for 0.167-0.20 of a report

Tomer: 20/100 = 0.2 reports per line of code

Charlotte: 20/120 = 0.167 reports per line of code

Acceptable ToT are within the two opportunity costs

Question 29

What is demand?

Accepted Answer

The quantity of a good consumers are willing and able to purchase at various prices

Question 30

What is the law of demand?

Accepted Answer

There is an inverse relationship between price of a good and quantity demanded

Question 31

What are complements and substitutes?

Accepted Answer

Complements: goods that are bought together (bacon and eggs; related demand)

Substitutes: goods that have the same purpose as another good (Pepsi and Coke; opposite demand)

Question 32

What is the substitution effect?

Accepted Answer

When changes in price for one product increase demand for a substitute product

(when Pepsi demand goes down, Coca-Cola demand rises)

Question 33

What is the income law of demand?

Accepted Answer

Income affects purchasing power and thus the demand a consumer has for a product

(as my income rises I can buy more Coca-Cola)

Question 34

What is the law of diminishing utility/satisfaction?

Accepted Answer

As you continue to consume a given product, you will get less additional utility (satisfaction) from that product

(as I drink more Coca-Cola I will lose the amount of satisfaction I get from drinking Coca-Cola)

Question 35

What is the law of complementary goods?

Accepted Answer

When two goods are complements, they have joint/related demand

(if demand for burgers decreases, so will demand for fries)

Question 36

What is the law of future expectations on demand?

Accepted Answer

If consumers believe that prices will rise in the future, demand will increase in the short-term

(if people think the cost of toilet paper will rise the demand goes up right now)

Question 37

Does the price shift the demand curve?

Accepted Answer

No, it just moves a point along the line

Question 38

What is supply?

Accepted Answer

The amount of a good/service that producers are able to provide to a marketplace

Question 39

What is the law of supply?

Accepted Answer

There is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve

Question 40

What is market equilibrium?

Accepted Answer

When the price at which quantities demanded and supplied are equal

Question 41

What is a shortage?

Accepted Answer

When the quantity demanded exceeds the quantity supplied (below the equilibrium)

Question 42

What is a surplus?

Accepted Answer

When the quantity demanded cannot meet the quantity supplied (above the equilibrium)

Question 43

What happens to equilibrium when demand or supply changes?

Accepted Answer

There is a new equilibrium price and quantity

Question 44

What is market disequilibrium?

Accepted Answer

When prices fluctuate away from equilibrium, resulting in either a surplus or a shortage

Question 45

What is a price floor?

Accepted Answer

A government-induced limit on how low a price can be charged for a product

(can cause market disequilibrium)

Question 46

What is a price ceiling?

Accepted Answer

A government-induced limit on how high a price can be charged for a product

(can cause market disequilibrium)

Unit 1 - Basic Economic Concepts, AP Macroeconomics Flashcards